What you must know about Megatherm Induction IPO?

Megatherm Induction Ltd – Company Background

Megatherm Induction Ltd was incorporated in the year 2010 to manufacture induction heating and melting products. In the process it uses electrical induction such as induction melting furnaces and induction heating equipment. Megatherm Induction Ltd is a subsidiary of Megatherm Electronics Private Ltd. Apart from these induction and heating equipment, it also manufactures upstream and downstream equipment and machinery for steelworks. This includes products such as transformers, ladle refining furnaces, continuous casting machines, and fume extraction systems. In addition, it also makes electric arc furnaces for the alloy and specialty steel industry. Incidentally, there is a global trend to shift out of the blast furnace technology to the electric arc technology in the steel industry. In addition, Megatherm Induction Ltd  also offers turnkey solutions for steel plants. As at July 2023, Megatherm Induction Ltd had 285 permanent employees on its rolls.

The turnkey solution business a 360-degree solution, which includes planning, engineering, delivery, assembly, and commissioning of steel plants through the use of its own or outsourced systems and machines. In addition, Megatherm Induction Ltd also provides customer service with maintenance contracts and spare parts. The key market segments of Megatherm Induction Ltd are the secondary steel producers that recycle scrap, primary steel producers that convert iron ore into sponge iron and then convert it into steel through induction melting, automotive suppliers. In addition, Megatherm Induction Ltd also caters to ordnance factories and railroads, DI pipe manufacturers, and various engineering industries manufacturing critical parts at its own casting, forging and metal processing facilities. It has a manufacturing facility at Kharagpur with production capacity of around 300 furnaces annually. Globally, it also exports products to Latin America, Africa, Middle East, Europe, SAARC, and Southeast Asia.

Key terms of the SME IPO of Megatherm Induction IPO

Here are some of the highlights of the Megatherm Induction IPO on the SME segment of the National Stock Exchange (NSE).

• The issue opens for subscription on 25th January 2024 and closes for subscription on 30th January 2024; both days inclusive.
   
• The stock of Megatherm Induction Ltd has a face value of ₹10 per share and it is a book built issue. The price band for the book built issue has been set in the range of ₹100 to ₹108 per share. The final price of the IPO will be decided within this price band.
   
• The IPO of Megatherm Induction Ltd has only a fresh issue component and no offer for sale (OFS) portion as part of the IPO package. It must be remembered that the fresh issue portion is EPS dilutive and equity dilutive, but OFS is just a transfer of ownership and  hence it is not EPS or equity dilutive.
   
• As part of the fresh issue portion of the IPO, Megatherm Induction Ltd will issue a total of 49,92,000 shares (49.92 lakh shares), which at the upper band of the book building band of ₹108 per share aggregates to fresh fund raising of ₹53.91 crore.
   
• Since there is no OFS component in the IPO, the fresh issue portion will also double up as the overall size of the IPO. Therefore, the overall IPO size will also comprise of the issue of 49,92,000 shares (49.92 lakh shares) which at the upper IPO band price of ₹108 per share will aggregate to overall IPO size of ₹53.91 crore.
   
• Like every SME IPO, this issue also has a market making portion with a market maker inventory allocation of 2,50,800 shares. Hem Finlease Private Ltd will be the market maker for the IPO. The market maker provides two-way quotes to ensure liquidity on the counter and low basis costs, post listing.
   
• The company has been promoted by Seshadri Bhushan Chanda, Satadri Chanda and Megatherm Electronics Private Ltd. The promoter holding in the company currently stands at 98.92%. However, post the fresh issue of shares in the IPO, the promoter equity holding share will get diluted to 72.71%.
   
• The fresh issue funds will be used by the company for capex towards constructing the factory shed and for installation of additional plant and machinery. Part of the funds raised will also be used for funding working capital gaps and for general corporate purposes.
   
• Hem Securities Ltd will be the lead manager to the issue, and Bigshare Services Private Ltd will be the registrar to the issue. Hem Finlease Private Ltd will be the market maker for the IPO.

IPO allocation and minimum lot size for investment

Megatherm Induction Ltd has already announced the market maker allocation at 2,50,800 shares as inventory for market making. Hem Finlease Private Ltd will be the market maker for the IPO of Megatherm Induction Ltd. The net offer (net of market maker allocation) will be divided between the QIB investors, retail investors and the HNI / NII investors. The breakdown of the overall IPO of Megatherm Induction Ltd in terms of the allocation to various categories are captured in the table below.

The minimum lot size for the IPO investment will be 1,200 shares. Thus, retail investors can invest a minimum of ₹129,600 (1,200 x ₹108 per share) in the IPO. That is also the maximum that the retail investors can invest in the IPO. HNI / NII investors can invest a minimum of 2 lots comprising of 2,400 shares and having a minimum lot value of ₹259,200. There is no upper limit on what the QIBs as well as what the HNI / NII investors can apply for. The table below captures the break-up of lot sizes for different categories.

Key dates to be aware of in the Megatherm Induction Ltd IPO (SME)

The SME IPO of Megatherm Induction Ltd IPO opens on Thursday, 25th January 2024 and closes on Tuesday, 30th January 2024. The Megatherm Induction Ltd IPO bid date is from 25th January 2024 at 10.00 AM to 30th January 2024 at 5.00 PM. The Cut-off time for UPI Mandate confirmation is 5 PM on the issue closing day; which is 30th January 2024.

It must be noted that in ASBA applications, there is no refund concept. The total application amount is blocked under the ASBA (applications supported by blocked amounts) system. Once the allotment is finalized, only the amount is debited to the extent of the allotment made and the lien on the balance amount is automatically released in the bank account. The credit of shares to the demat account on February 01st 2024, will be visible to investors under the ISIN Code – (INE531R01010).

Financial highlights of Megatherm Induction Ltd

The table below captures the key financials of Megatherm Induction Ltd for the last 3 completed financial years.

Data Source: Company DRHP filed with SEBI

Here are some of the key takeaways from the financials of the company for the last 3 years.

• In the last two years, the revenue growth has been very robust. However, the net profit performance has been quite erratic and only in the latest year we see some genuine traction in the net profits and also in the net profit margins.
   
• While the company has reported volatile net margins, ROE and return on assets in the latest year, are very strong, although here again the previous data is not entirely comparable. However, a strong ROE is a good booster for the valuations of the company while ensuring that profit growth is likely to be robust.
   
• The asset turnover ratio or the sweating ratio has been robust at above 1 in the last two years and the hope is that as the sales pick up in the next two years, the sweating ratio should also pick up accordingly. Due to the robust ROA in latest year, a lower sweating can also be tolerated by the company.

The company has latest year EPS of ₹10.11 and previous data may not really be comparable. Either ways, the valuations look reasonable if you consider latest year EPS at 10-11 times P/E discounting. However, business is known to have volatile margins and that is something we have seen in the last 3 years also, and is generally tuned to the cycles in the steel industry. What stands in favour of Megatherm Induction Ltd is that they have a very strong relationship matrix with clients as well as the proven ability to handle complex technologies. That should work in their favour. Also, its deep presence and relationships in the industry are an added plus. The industry is such that it would naturally suit investors with a higher risk appetite and a longer time frame. That applies to the IPO of Megatherm Induction Ltd also.