Business Analysis: Bedmutha Industries

Background:

Bedmutha Industries Ltd is a manufacturer of Steel and copper wire products including - wire rope, tyre bead wire, galvanized wires, galvanized patented wire, phosphate patented wire, HC wire for ropes, spring wire, cable armouring wire, earth wire, stay wire, barbed wire etc.

Manufacturing facilities: 

Company has manufacturing in Sinnar, Nasik and Nardana, Dhule in Maharashtra. Company raised Rs. 92.11 cr through IPO in in 2010 which was utilised for the setting up Mega Project plant in Nardana, Maharashtra. Mega Project Status provides for incentives to the extent of capital investment via refund of VAT paid, stamp duty exemption, electricity duty and certain other benefits by Maharashtra government. The total project cost was ~Rs. 311 cr.; term loan of Rs. 200 crs was sanctioned by consortium lenders for this Green Field project in FY2012. 

Management expected the phase-I of the factory premises i.e. High speed Galvanizing Line for manufacturing wire products to be operational by early 2013 & total project by end of 2013.  The first phase was completed on 23rd November 2013 for trial production. Eventually, Section 1, 2, 3 and 8 (phase 1) started with commercial production in September 2015 while section no 4, 5, 6, 7 and phase 2 of section 8 are yet to be completed. 

Company finalised debt restructuring with consortium lenders in March 2015. Consortium lenders agreed for disbursements of Rs. 35 Crores as new term loan under restructuring package. This new term loan was disbursed with delay in March 2016 which led to further delay of Phase 2 completion.  

Company started production of copper, tyre beads and wire ropes during FY2016. Company expects production level of 9000 ton per annum from copper plant with plan to further increase the capacity to 12000 ton per annum. Company also plan to increase rope plant capacity from 7200 ton per annum to 12000 ton per annum in phase 2 subsequently, for which an investment of about Rs. 20 crores which will be raised through a mix of borrowings from banks &/or internal resources. 

Various stages of Dhule plant: 

1. Pickling section 

2. Rod breaking section (phase 1 & 2) 

3. Galvanizing line 

4. Medium Fine Section (phase 1 & 2) 

5. Wet Wire section (phase 1 & 2) 

6. Rope Plant (phase 1 & 2) 

7. Tyre Bead line (phase 1 & 2) 

8. Copper Plant (phase 1 & 2) 

Reasons for delays:

1. Heavy rainfall in September 2013 and cyclone in February 2014, due to which the whole erection and commissioning activity got delayed by 60 days at site, since the dedicated electrical line got disrupted.

2. Company faced hindrances from banks for disbursements of term loans.

3. The volatility in dollar led to increase in the cost of imported equipment by 20 percent.

4. Global excess capacity, significant jump in imports weighing heavily on the steel business and steel prices

5. Fall in oil prices and slackness in the mining sector the world-over lead to a fall in volumes and reduction in margins in Wire Ropes business

Debt Restructuring: 

Company’s performance was affected due to uncertainty in growth pattern and slow growth rate of economy throughout the financial year 2014-15 resulting in low capacity utilization of existing and new plant. This forced company to approach the consortium bankers for restructuring of loan for Nardana project. Through JLF formation, bankers gave relief in repayment of instalments. Bank’s also agreed for new loan of Rs. 35 cr subject to management infusing additional equity. 

Warrant Issuance / Infusion of Equity: 

As part of restructuring package, bankers asked management to infuse additional equity in the business. Board approved mobilization of ~Rs. 5.43 cr by issue and allotment of upto 35,00,000 warrants on preferential basis to the promoter group, each convertible into one equity share at a price of Rs. 15.50. Company allotted 20,00,000 equity shares to Bedmutha Sons Realty Ventures Pvt. Ltd. on 11th July, 2016 upon conversion of preferential warrants into equity shares. This conversion led to increase in paid up capital from Rs. 21 cr to Rs. 23 cr. Board further approved issuance of additional preference shares for Rs. 2 cr in May 2017 to meet the long term fund requirements of business. Equity dilutions adversely affects the rights of existing shareholders; however dilution seems necessary in Bedmutha's case given high financing cost of existing debt in a difficult environment.

In this context, it is also important to note promoters increased their consolidated salary from Rs. 54 lakhs in FY2015 to Rs. 2.2 cr in FY2016. Management has in effect taken money from the company as salary and invested back to subscribe to additional shares. This may be seen as a red flag by investors. We need to see if management retains same level of renumeration for FY2017 or reverts back to normal levels. A close look at recently disclosed quarterly numbers shows the employee benefit expenses have increased to Rs. 16 cr in FY2017 against Rs 12 cr in FY2016. Annual report will provide more clarity on promoters salary. 

*Company has pledged 50% of their shares with the lenders.

Financials: 

Company increased sales at CAGR of 32% in last 3 years. Sales, however, didn’t result in profits due to large interest expense and lower operating margins ~2-5%. Company’s loss is Rs. 52 cr in FY2017, third year of continuous losses.  

Company has pushed for topline growth to seek benefit of incentive scheme. Company accounted for subsidy of Rs. 9.5 cr in FY2016 against Rs. 5.5 cr in FY2015 under the scheme. Company has accrued ~15.0 cr in FY2017 which may increase to ~Rs. 30 cr next FY2018 if sales doubles in next year (Rs. 1250 cr as per management guidance). The incentive scheme will end in Nov 2020; back of the envelope calculations suggest company may receive subsidies totalling to ~Rs. 100 cr in 3 years (FY2018 to FY2020) which is 1/3rd of company’s debt. 

Topline growth is mainly contributed by the Copper (copper is priced ~10x of Steel) business which started production in FY2016. Copper contributed 10% of Sales in FY2016. It is expected Copper business will increase to 50% of the overall Sales in next couple of years. Company expects revenue of Rs. 1,250 cr in next FY - the distribution is expected to be as per below:

Copper business (Revenue - Rs. 500 cr): 

1. Bus bars: 25% revenue share 

2. Foils: 25% revenue share (expected margin of 15-20%)

3. Wires: 50% revenue share

Steel Business (Revenue of Rs. 500 cr):

1. Ropes: 15% revenue share (expected margin of 25% - most value added product)

2. Tyre beeds: 15% revenue share (expected margin of 15%)

3. Wires: 70% revenue share (expected margin of 15%)

EPC business: Rs. 250 cr with expected margin of 15%. 

Management expects double digit margins from value added products. Management needs to complete the phase 2 to start production of value added products at the earliest.  

Bedmutha’s operating parameters have not deteriorated due to strong push for topline growth. Receivable days have infact come down significantly.  

Accusations for inter-party deals: 

The case against the Executive Directors, Company Secretary and the Company under Section 297 of Companies Act, 1956 got concluded in July 2015. Magistrate penalised the each director for Rs. 10,000/- totalling to Rs. 50,000. An investor needs to closely look at these penalties to gauge the corporate governance levels in the company. 

Subsidiaries:

Bedmutha has two subsidiaries:

1. Ashoka Pre-Con Pvt. Ltd (APPL): Bedmutha has share holding of 49% in APPL. APPL manufactures pre stress concrete products such as cement poles, RCC pipes, Cement Piles, railway sleepers etc. APPL offers a direct synergy in terms of consuming GI Wire, MS Wire and PC Wire from our wire unit. 

2. Kamalasha Infrastructure & Engineering Private Ltd (KIEPL): Bedmutha has shareholding of 54.75% in KIEPL. KIEPL implements turnkey contracts for infrastructure namely in power, roads, railways etc. KIEPL was awarded a sub-contract of Rs 6000.00 lacs in Dharangaon Division of Maharashtra State Electricity Distribution Company Limited (MSEDCL). KIEPL offers a direct synergy in terms of consuming GI Wire, Stay Wire & indirect synergy by consuming PSC Poles, cables, conductors. 

Related-party transactions: 

Company undertakes multiple transactions with related parties at arm’s length. Company undertakes EPC business from Kamlasha the advance is undertandable. Elme and Techno advances need to be scrutinised closely.  

1. K.R.Bedmutha Techno Associates Pvt. Ltd.: Advance of Rs. 1.7 cr; 5 year contract. 

2. Elme Plast Company: Advance of Rs. 2.8 cr; 5 year contract.

3. Kamalasha Infrastructure & Engineering Pvt Ltd: Advance of Rs. 4.8 cr; 5 year contract.

Valuation: 

Bedmutha has market cap of Rs. 90 cr~ 3X EBIDTA. 

Sales of Rs. 1250 cr with operating margins of 15% will result in EBIDTA of Rs. 190 cr (double of the current market cap). Expect company to achieve toppling of ~Rs. 1250 cr since the capex is already done. What's important for company is margin expansion, which will depend on its ability to start commercial production from phase 2.  

If company improves margin to 10% from current 4-5%; EBIDTA would be Rs. 125 cr. If company’s valuation trade at 1.5 time EBIDTA, company would have market cap of ~190 cr.   

Bharat Wire Ropes, a direct competitor, has market cap of Rs. 385 cr with annual top line of only Rs. 65 cr ! 

Conclusion:

Bedmutha Industries is a classic case of leveraged balance sheet with existing production capacity. If management could increase the sales of value added products with better margins,  Bedmutha will end up with a stronger balance sheet. In all this struggle, it is utmost important for management to stick to best corporate governance practices. 

Disclaimer:

All data has been taken from public sources. I own shares of Bedmutha Industries at the time of writing this article in small quantity. This has not been disclosed as part of portfolio disclosure since the holding is very small (less than 4% of portfolio). This may have led to biases in my analysis. An investor should do her own analysis before making an investment decision. The views expressed are personal and doesn't represent that of my employer’s.

This article is just a collection of my thoughts about the company.

I am not registered with SEBI under SEBI (Research Analysts) Regulations, 2014. As per the clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations.

Please refer to 'Disclaimer' page for further details.