At Wisdomsmith, we have been happy to see India’s two SME exchanges providing an avenue for SME entrepreneurs to raise equity capital. It is hard for most SME businesses that are not tech startups to raise venture capital funding.
This week, Innomet Advanced Materials, a Hyderabad based SME company, will list on NSE’s SME exchange. The company finished its IPO the previous week. Some years ago, we had tried to raise venture capital (VC) funding for Innomet. However, we did not succeed. While its business is strongly based on innovation, most VCs we talked to found declined for a variety of reasons. One big reason is that very few VCs back manufacturing companies. Those who do, tend to have higher revenue threshold for manufacturing companies compared to service companies, the logic being: manufacturing is harder to scale up. This logic is not without its merit; however, we were strongly convinced that Innomet had something unique to offer.
Now that Innomet has raised around Rs 30 crore from the SME IPO route, it is well placed to realise its potential. We suggest investors who look at small caps, particularly on the SME exchange, should track this stock.
Let us briefly explain why we like the business. Innomet is in powder metallurgy, a highly R&D driven business. Its core business is metal powders, where it focuses on specialty powders like alloy powders, as compared to bulk powders like iron or copper powders. The important thing is: the technology to make these powders is not available off the shelf. Innomet has developed it inhouse through inhouse development. There are two main techniques to make metal powders – water atomisation and gas atomisation. Innomet now has the ability to make powders via both the routes. Gas atomisation is a more advanced method, you can make finer sized powders through this route. Innomet developed this technology under a research grant from the Central government 3-4 years ago. There are diverse uses of metal powders: in areas like surface coatings, components, diamond cutting tools, even green hydrogen and EV batteries. In fact, Innomet is doing some work in both latter two areas mentioned.
Another business of Innomet is Tungsten Heavy Alloy (THA) components. These go into applications like defence armament, space, aviation, nuclear power plants. In India, there is no private sector manufacturer in this area. One ordinance factory of India’s defence establishment makes them. While THA is a small part of the overall business, it is expected to grow. Innomet’s RHP declared a good orderbook in the THA business. Margins are also very high in this segment.
The only listed peer for Innomet is the PSU Mishra Dhatu Nigam – called Midhani for short –, which has a market cap around Rs 7500 crore, implying a PE of almost 100x. Innomet is much smaller than Midhani, so will get not such a high PE. But given the differentiated nature of its business, it could command a robust PE. The IPO was aggressively priced, at over 35x trailing PE; such a high PE is not normally seen in SME IPOs. But if Innomet can deliver good growth post listing, it could well sustain a high PE.