Precision Camshafts - A good value buy now?

Hi everyone,

I missed on the ipo of Precision Camshafts (thankfully) but after around 30% correction, I feel it is a good buy now. Following are the points on which I am bullish:

1. Truly a leading company in Camshafts with 9% global share
2. Company has good expansion plans and had raised money from IPO to fund those ambitions.
3. Company has added Japan recently as their supply market and expanding faster into other markets as well.
4. Company supplies to almost all leading auto manufacturers and so has a credible brand and customer relationships.
5. Company has been growing at around 19% CAGR and is hungry for more.
6. It is adding a plant near to their Solapur plant to expand capacity and it should be operational by Aug 16.
7. I felt that the IPO was reasonably priced and after this correction looks really a value buy.

Any other thoughts welcome!

 

At IPO stage IndiaNivesh and Philip Capital said to AVOID.

IndiaNivesh

Through the IPO, Precision Camshaft Limited (PCL) proposes to offer 12.9 mn new
shares and 9.15 mn shares for sale by promoter & promoter group (PPG).Currently
PPG holds 66.7 mn shares (81.51%) and others holds 15.13 mn shares (18.49%).
The company plans to utilize Rs. 2 bn raised from fresh issue for establishment of a
machine shop for ductile iron camshafts. At the upper end of the price band on a
fully diluted equity base, the company is trading at 28.2x FY15 EPS and 18.2x
FY18e earnings. Although historically the company has demonstrated strong track
record of growth, execution and competitive strength, the initial public offering
(IPO) is priced at a premium which doesn’t leave much scope for gains for minority
shareholders. According to us such premium is not justified given the ROE is
expected to fall and remain close to 15% for next 3 years after 16% equity dilution
due to IPO and also capacity expansion from IPO proceeds is not expected to add
much to financials before FY18E. We believe buying in secondary market would be
better option for investors. Thus we recommend investors to AVOID this issue.

Philip Capital

Precision Camshafts is one of the leading manufacturers of camshafts globally. The company
has +8% market share in the global passenger‐vehicle camshafts segment; exports
contribute to +75% of its revenues. Its key strengths include – long‐standing relationships
with clients, well‐developed technological expertise, and huge variety of camshafts (+150,
each with a lead time of over three years). While we like the company’s current business, we
recommend investors AVOID this issue. Our key concerns – (1) currency depreciation, not
just volumes, has chiefly driven historical growth, (2) return ratios will be hampered after
net worth doubles post issue (ROEs will dilute to 13% in FY17), (3) low scope of margin
improvement (even historical margins were driven by currency tailwinds and export
incentives), (4) nature of business demands consistent capex and funding for growth, (5)
expensive valuation – 23x FY17 for a business with limited growth avenues. Also, high
management compensation (30% of FY15 PAT) and compensation structure does not favor
minority investors.

Same logic may apply now also even if stock price is down (all stock price are relatively down)

 

If you see the report then then are not denying the strong fundamentals on which the company is standing on ie. high pedigree, market share, customer relationships, technology etc. They have talked about valuations being expensive. But now the stock has corrected almost 30%. High management compensation is something that maybe an issue, but not a blocker in my opinion. If the company is delivering good growth and generating good results, then better valuations should follow, no?