RDB Rasayans Limited IPO - An Insight - Indian IPO Blog

Wednesday, September 21, 2011

RDB Rasayans Limited IPO - An Insight

Source:  Indian IPO Blog Insights

RDB Rasayans Ltd, a packaging material manufacturer, engaged in manufacture and sale of FIBC (Jumbo Bags), Woven Sacks and various woven polymer based products, has entered the capital markets with Public Issue of 45, 00,000 Equity Shares of Rs.10/- each. The IPO would remain open for subscription for 3 days between September 21, 2011 and September 23, 2011

The Pricing of the 100% Book Building Issue has been done rather ambitiously at Rs.72/- on the lower end of the price band and Rs.79/- at the upper end of the price band. Chartered Capital And Investment Limited is the Book Running Lead Manager as well as the Syndicate Member for the IPO, while Link Intime India Pvt. Ltd. is the Registrar to the Issue. Applications can be made in a Price Band of 80 Equity Shares and in multiples thereof. Brickwork Ratings India Private Limited has assigned the IPO Grading to the Issue

A factor worthy of a note is that the equity shares will be listed only on the Bombay Stock Exchange (BSE) and not on National Stock Exchange (NSE)

Company Background:
RDB Rasayans Ltd. is a subsidiary of RDB Industries Ltd. and engaged in manufacture and sale of FIBC (Jumbo Bags) and Woven Sacks and and various woven polymer based products like container liners, protective irrigation system, canal liners, etc. These products use fertilizers, cement, polymers, chemicals, textiles, machinery, automobiles and steel industry etc. Its manufacturing facility is located in West Bengal

RDB Rasayans Ltd. manufactures fabrics for the manufacture of FIBC and sacks; flat and triplex tapes in India. Its products include bulk bags FIBC, such as corner and full loop, circular, sling loop, UN, conductive, and electrostatic bags, as well as standard bulk bags for agricultural products and construction materials; and multiwall bags, which include PP and PE valve bags, and lami bags. RDB Rasayans exports its products to various countries in Europe, Australia, and the Middle East. The company was founded in 1995 and is based in Kolkata, India.

It can be seen that the company's product portfolio essentially consists of only Bulk Bags (FIBC) and Multiwall Bags. The Company plans to utilize the proceeds from the IPO to finance the capital expenditure to enhance the manufacturing capacity by establishing another unit besides meeting the issue expenses and general corporate purposes

IPO Grading:
Brickwork Ratings (BWR) has assigned BWR IPO Grade 2 to the proposed IPO of RDB Rasayans Limited (“RRL”). Brickwork Ratings’ BWR IPO Grade 2 indicates "Below Average Fundamentals" for the issue in relation to its peers. BWR assigns IPO grading on a scale of IPO Grade 5 to IPO Grade 1 with Grade 5 signifying strong fundamentals and Grade 1 poor fundamentals of the issue in relation to its peers

According to the Grading Report from Brickwork Ratings, the grading factors RRL’s experienced management team and promoter group, strategic cost/logistic advantage enjoyed by RRL due to their location close to clients and ports, healthy growth of domestic packaging industry as well as demand from Western and European countries  and good clientele and suppliers. The grading is constrained by volatility  of raw material prices and RRL’s inability to fully pass on the production price hikes, negative cash flows from operations, fragmented nature of industry with high level of regulation, number of litigations against the promoter and group companies, risk of adverse business environment with regard to labor unrests and cyclicality of end-user sectors

Click here to download the complete grading report of Brickwork Ratings

Analysis of Financials:
A significant factor worth consideration when it comes to the financials of the company is the negative cash flow from operations. The Prospectus filed with SEBI details the following cash flow position of the company during the preceding five years:

As can be seen from the above, the Net Cash Flow from Operating Activities of the company has been widely volatile and also cuts across into the negative quadrant for FY ending on 31-3-2008 and FY ending on 31-3-2011

The following is the company's statement of assets and liabilities and Profit and Loss statement as per the RHP filed with SEBI:

For the FY ending 31-3-2011, on a Sales of around Rs.46.13 Crs, the company has posted a PAT of only about Rs.1.80 Crs, which implies a profit margin of less than 4% of the revenue. The story in earlier four years has also been quite similar with profit to sales margin remaining under 6% in those years as well

The Equity base for the company is also comparatively high with Equity Share Capital alone constituting around 74% of the total Net Worth of the company. For the FY11, the EPS of the company comes to around 1.37, which when compared to the Price Band, gives an exorbitant PE multiple of around 53 times even at the lower end of the Price Band.

Special Remarks:
The general volatility of raw material prices and RRL’s inability to fully pass on the production price hikes may result in lower profit margins leading to low profitability in future. Besides, negative cash flows from operations and a number of litigations against the promoter and group companies plays a significant role in denting the credibility of the IPO. Investors may want to give the IPO a skip and opt for listed stocks with better profit margins and stronger fundamentals

Source:  Indian IPO Blog Insights

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