Category: IPO/NFO

Business of Redington (India) Limited
Redington is in the business of distribution of IT Products and providers of logistics, supply chain management, and other support services in India, Middle East and Africa. Apart from this Redington has recently commenced distribution of mobile handsets in parts of India and Nigeria.
The IT products that Redington deals in represents peripherals, printers, scanners, plotters, cartridges, PC components like monitors, hard drives, CD writers, CD ROMs, processors and motherboards. The company does not produce these things but sources it from vendors and then is engaged in the distribution of the same. The company also manages logistics and has 53 warehouses spread across 22 states in India as well as access to various markets in Africa and Middle East through its subsidiaries.
Financials
The company has been on the growth path as far as revenues are considered with revenues for the period ended September 30 2006 touching Rs. 41,313.82 million and Rs. 67955.46 million in the year 2006 and Rs. 40,542.77 million in the year before. While this represents strong growth the company operates in a highly competitive market and therefore the gross margins are quite low. The net profit after tax of the company for the corresponding periods have been Rs.397.19 million, 719.74 million and 436.54 million which hovers just around and under the 1% mark and makes it a risky bet.
The EPS for the company for fiscal 2006 is Rs.4.79 and the company is offering its share in a price band of Rs 95 – Rs. 113 which translates into a P/E of 19 times lower price and 23 times upper price.
Key Risks
Apart from the low margins that the company has there are other key risks that the company faces namely pending civil and criminal proceedings against it or the directors as well as outstanding contingent liabilities. These risks magnify because of the lower margins of the company and because if any of these do surface up Redington’s bottom line would suffer. Redington also depends on a few number of products to constitute majority of its revenues and the top 5 products contributed 77% of the revenues in the year 2005-06.
Conclusion
While the company is on the growth path and has showed phenomenal growth in its top-line the industry is inherently competitive and to manage its growth profitably would be challenging for Redington. Such an environment makes Redington a  high risk stock.
 

Business of Cinemax India 

Cinemax is part of the Kanakia real estate group and is a large multiplex operator with 33 screens and 9000 seats at 10 locations across Mumbai. Cinemax is largely concentrated in Mumbai which gives it an advantage in terms of Mumbai contributing to 15% of all box office sales across the country. Apart from multiplexes the company also has interest in gaming and mall development. The majority of the revenue however does come from film exhibition and for the year 2006 it stood at 62.7% of the total revenues. 

Financials 

The company has seen its average ticket price increase from Rs. 86 to Rs. 120 in the first half of FY 07 and expects the spend on food and beverages to increase as well. The spend on food and beverages has been lower at around 20% when compared to other multiplexes and the management has decided to take care of this by introducing non vegetarian food and therefore is expecting a jump in this segment as well. 

The revenues for the year FY06 have ben Rs. 74.6 with profit after tax at Rs.7.7 crores and EPS at Rs.3.70. The IPO opens on January 18^th and closes on the 24^th with an offer price between Rs. 135 and Rs. 155. While the price band looks expensive if one considers the valuation of the year 2006 the analysts expect the P/E to be around 15 to 18 times estimated FY 07 earnings which may be a better figure to look at. 

Expansion Plans 

The company has got expansion plans to make it a pan India player and it plans to add 11 screens in the north region, 50 in the north-east region and 47 in the western region which means a corresponding increase in the seats of 2900, 12,200 and 11,000 over a period of the next three years. This expansion would help the company take advantage of the lifestyle boom across the country but it would also mean that the company would have to compete with other players like PVR, Adlabs and Inox which would be already present in some of those regions. 

Conclusion 

While the company is in a sector that is doing well and the Cinemax itself has got considerable experience in the industry to grow and manage that growth properly, going forward it will face more competition and also will have to operate in geographic regions in which it was not present earlier. 

Another factor to keep in consideration while investing in the stock is that most of the investment has been chalked out for the next three years and the returns to that are likely to come in a more longer term horizon and therefore this stock is not suited for investors who take a shorter term view of less than an year or so of their investments. 

Business of Technocraft Industries 

Technocraft industries was established in the year 1972 by two brothers – MR. SK Saraf and Mr SM Saraf who were IIT Graduates and technologists. 

Technocraft is mainly engaged in the business of drum closures, steel pipes, tubes and scaffoldings and cotton yarn. It is a company which is export oriented and derives most of its revenues (86% of the first half in FY 07) from exports to around 60 countries across the globe. Technocraft markets its products around the world with subsidiaries in UK, Hungary, Poland and Germany. 

Financials 

Technocraft clocked total revenues of Rs. 36,581.55 lakhs in 2006 which was lesser than the revenues it clocked in the preceding two years which stood at Rs.41,920 lakhs and 37,487 lakhs. The profit figure for the same period stood at Rs. 3055 lakhs, Rs.3094 lakhs and 2770 lakhs respectively. 

The company is offering its share at a price band of Rs. 95 to Rs.105 which translates into a P/E multiple of 6.8 to 7.5 times earnings considering the post diluted annualized EPS for FY 2007. By far this is the most reasonably priced stock in the slew of IPOs that are slated to come in mid January. 

However the reason for the lower P/E is the sluggish growth that the company has faced over recent years as also the net profit margins which have gone down from 9.3% in FY 04 to 8.4% in FY 06. 

Objects of the Issue 

The issue is expected to provide funds for improving the manufacturing process of Drum Closures to make it more cost effective, expand the capacity of pipe and scaffolding division and introduce new scaffolding products. Apart from this Technocraft also plans to finance the expansion of the yarn division for 25,200 spindles and set up a 15 MW power plant. 

Going forward the company has got expansion plans in the drum closure market in China. China is a promising market for drum closures but is protected by high duty structure. However the demand for drum closures is quite static in other parts of the world because of alternate products being available for the same use. 

On the other hand the demand for steel scaffolding and tubes is growing at quite a rapid pace but this product is quite sensitive to the prices of its key raw material which is steel and is dependent on its profitability upon the price fluctuation of steel. 

Yarn manufacture is not one of the core activities of the company and in all probability it has been forced to look at this option rather than having any synergy value with the core business. 

Conclusion 

While the company has got a good solid past performance in terms of being over 25 years old it is not the kind of high growth story that an investor would expect from a relatively small player. 

Business of DLF

DLF is the largest real estate company in the country in terms of completed residential and commercial property development. DLF is in the business of end to end real estate development which focuses on residential and commercial properties. This involves identification of land, acquisition of land, planning, execution and marketing the developed property. In the residential building line DLF markets and sells various houses built and developed by it and with a focus on the higher end of the market.
In the commercial line DLF builds and either sells or leases commercial offices with a special focus to MNCs.

Apart from this DLF is also in the retail business line where it develops, manages and leases shopping malls which in some cases also have multiplex cinema halls. The company has also entered the Infrastructure, SEZs and hotels businesses.

DLF was found in 1946 and has since then become the largest real estate company with development of approximately 220 million square feet of land. DLF has extensive land reserves in the country amounting to 10,255 acres with a developable area of roughly 574 million square feet. Out of this 574 million the company owns about 29 million square feet along with other parties and owns the sole rights to the rest of the land. The company’s focus has so far been the NCR but now it is expanding its core operations to the rest of the country as well. The majority of the land holdings lie in the urban areas or areas which under the urban category based on the master plans of various states.

Financials

The company has gained in its financial strength in the last three years with additions both in top line and bottom line. The revenues have increased from Rs.5266 million in 2004 to Rs.6240 million in 2005 and 12,420 in 2006 with corresponding profit figures of Rs.538 million, Rs.865 million and Rs.1917 million. The majority source of revenues for the company is the sale of the real estate developed by it and the project cost constitutes the largest source of expenditure for the company.
The above profit and revenue figures show that the profitability of the company is steadily growing and currently stands at 15% of its revenues. The adjusted EPS for the year ended March 31 2006 stands at Rs.12.34.

Objects of the Issue

The IPO of DLF is expected to be the biggest that the country has seen so far and the purpose of the IPO is the acquisition and development of land on which DLF plans to spend Rs. 65000 million and development and construction costs for existing projects on which the company plans to spend Rs.34993 million rupees. Apart from this the proceeds of the issue are also expected to be used for part prepayment of debt that the company has incurred.

Conclusion

DLF is a powerhouse of real estate development in India and with its thrust in the new areas of expansion that it has identified it is expected to become a driver of growth for the investors. However in such a scenario one need to also keep an eye on the price that the company is offering its share to the shareholders and see whether the company is not charging a P/E multiple that is too high.

Business of Shri Balkishan Agarwal Industries Limited

Shri Balkishan is a glass manufacturing company established in 1990 located in Firozabad and the primary products of the company are glassware, tableware, bangles and kitchenware. While the initial furnace capacity of the company was 40 tons per day the company increased its capacity three times to 120 tons in year 2004 and also engaged itself in getting various quality certifications as well as installation of modern machinery to replace some of the manual processes and unlock productivity.

Such steps enabled the company to increase the turnover from Rs. 8.83 in 2003-04 to Rs. 31.06 crores during 2004-05.

Shri Balkishan has over 200 products that they sell to a range of diversified customers which include both retail as well as industrial customers. Some of the better known customers of Shri Balkishan are Vishal Mega Mart, Big Bazaar and Metro Cash and Carry. These customers buy the products categorized under press glass as bowls, cups and saucers, glass tumblers, mugs / jugs and plates.

Among the other products the company sells bottles of sizes ranging from 100ml to 1000ml and industrial consumers are the major customers for these who are the manufacturers of beer, alcohol, pharmaceuticals, perfumes and cosmetics.

The corporate consumers and retail customers buy the products that fall under the thin glass, decorative articles and handicrafts category like wine glasses, glass tumblers, dinner sets, dishes and flower pots etc.

Summary Financials of Shri Balkishan Agarwal Industries Limited

The thing to keep in mind while looking at financials is that it is important to consider financials of the past few years and it is not enough to just consider the financials of just one or two years. For instance even in the case of Shri Balkishan the EPS for 2006 is Rs. 5.50 whereas it was just Rs.1.63 the year before, Rs.0.07 in 2004, Rs. 0.4 in 2003 and Rs. 0.38 in 2002.

While the above EPS has increased on the back of an increased revenues base from Rs. 23.21 crores in 2005 to Rs.31.06 crores in 2006 which again is a result of the increase in capacity expansion from 40 to 120 tons.

However while valuing the fair price of the IPO you must not stick to the number of just the last financial year which is especially higher in this case. This is because increase in revenue is a result of employing more capital which involves greatest interest outgo which in this case rose from Rs. 45.63 lakhs in 2004 to Rs.3.33 crores in the next financial year. Same is the case with depreciation charges which also increase as the investment in fixed assets increase. The same rose from Rs.45.63 lakhs in 2004 to Rs.1.46 crores in the next financial year and then to Rs.2.5 crores in 2006.

Such spike in costs that come along with increased capacity and revenues make it necessary for the investors to consider the long term earning of the company and not only the last year’s earning.

Risk Factors

Financials are an important criterion of deciding whether one should opt for an IPO or not and in the case of Shri Balkishan one must note that in the immediate preceding financial year 2005-06 there has been a substantial jump in profitability. However the best thing for an investor would be to discount this spurt in income and look at the long term rate of profit and growth that the company is enjoying.

Along the same lines the Contingent Liabilities of the company have also substantially increased in the last fiscal increasing from Rs. 92.46 lakhs to Rs.1.88 crores which is more than double in one fiscal.

Shri Balkishan has SBI as its principal banker and during February 2006 SBI has classified their account as a Non Performing Asset. This matter has been necessitated by a dispute in excess interest being charged by SBI and the company. The dispute has now been resolved and the bank will charge a lower interest retrospectively subject to completion of IPO and a certain other conditions.

The IPO is being carried out to raise funds for expansion however the capacity utilizations of the furnace has never been more than 52% currently.

Conclusion

The company is one which is long standing and has got a well diversified base and modern machinery in a growing market. However the current financials and quite out of sync with the financials in the years preceding to that and that is a cause of a huge risk that the issue price of the IPO might be quite high as compared to an averaged out earning.