Four companies in same business do not augur well for public investors!
Notwithstanding promoters’ cost of holding close to IPO price, Servalakshmi Paper may suffer from credibility issue as three more companies of the promoters are engaged in the same industry.
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OFFER AT A GLANCE |
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Name |
Servalakshmi Paper Ltd |
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Offer Quantity |
2.07 cr to 2.22 cr Shares of Rs 10 each |
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% on Total Equity |
48% to 49.8% |
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Offer Amount |
Rs 60 cr |
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Offer Price |
Rs 27 to Rs 29 |
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Bid Quantity |
200 & Multiples of 200 |
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Bid/Offer Opens |
April 27, 2011 |
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Bid/Offer Closes |
April 29, 2011 |
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Rated By |
ICRA |
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Rating |
2/5 |
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Lead Managers |
Keynote Corporate, Indian Overseas Bank |
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Registrars |
Link Intime India |
Issue Objective
The company intends to part finance the Rs 60 cr worth second phase of its integrated paper mill estimated to cost Rs 340 cr.
Parentage
Servalakshmi Paper Ltd (SPL) is a relatively new company belonging to the Coimbatore-based Servall group well known to the paper industry for supplying paper machinery. Besides SPL, three more group companies are already engaged in the manufacture of paper with a combined capacity of 45000 tpa.
The group’s expertise has reportedly helped SPL to save capital cost by more than Rs 100 cr as the entire project planning, erection and commissioning have been handled by the group company Servall Engineering who is claimed to be a pioneer in paper machinery design and manufacturing.
Business
The company is engaged in the segment of Printing & Writing paper and Newsprint. It intends to produce coated, uncoated, copier, cream wove, SS Maplitho, computer stationery and text/note book papers.
Project Status
Though SPL was incorporated in 2005, the company undertook to set-up its paper project a year ago. The first phase of 90000 tpa capacity coupled with 15 MW captive power plant at a cost of Rs 280 cr, was completed in March 2010 and the phase II of 18000 tpa capacity at a cost of Rs 60 cr is scheduled to start production in September this year.
Prospects
SPL proposes to use 90% waste paper pulp which makes it eligible for eco-friendly paper. The company also claims that its mill is the first in India to use the POM technology from Finland in stock preparation which helps in saving the energy thereby reducing the cost of production.
In the first seven months of operation, SPL has achieved a sales turnover of Rs 39.18 cr. But, this resulted in a net loss of Rs 14.9 cr. The company claims that, whereas recent capital cost of other paper projects amounted to over Rs 40,000 per tonne, its cost has been contained at less than Rs 30,000 per tonne. This may benefit a lot in the long run when the company achieves its optimum capacity.
Valuation
SPL, whose current bottom line is in red, is asking a premium of Rs 17 to Rs 19 for Rs 10 paid-up share. Their argument is that a substantial portion of the company’s integrated paper project is already in operation and also the promoters cost of holding is around Rs 25 per share.
Though the above argument many justify the IPO price of Rs 27 to Rs 29, a couple of points need to be noted. First, at the end of October 2010, its Book Value per share has been reduced from Rs 24.75 to Rs 18 in view of operational loss. This may deteriorate further when the company declares the full working for Fiscal 2011.
Second, SPL being the first public company of the promoters, unless and until the company puts up an impressive operational performance, the scrip may not attract investors in the secondary market.
Peer Group Comparison
Since SPL is currently loss-making, it cannot be compared with its peers in term of Price-Earnings. However, if the current discounting of other leading integrated paper manufacturers like Ballarpur, TN Newsprint, JK Paper, etc., is any indication, there is not much scope left for capital appreciation in the immediate term.
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How Servalakshmi Paper compares with peers |
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DESCRIPTION |
COS |
M-CAP |
P/E |
P/BV |
P/FV |
P/R |
OPM |
Div.Yld |
PRICE |
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(Rs Cr) |
(X) |
% |
(Rs) |
||||
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Ballarpur Industries |
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2,406 |
57.3 |
1.5 |
18.4 |
2.2 |
16.3 |
1.4 |
36.70 |
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Tamil Nadu Newsprint |
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956 |
5.7 |
1.2 |
13.8 |
0.8 |
28.3 |
3.3 |
138.10 |
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JK Paper |
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412 |
3.5 |
0.9 |
5.3 |
0.3 |
21.7 |
3.8 |
52.70 |
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Emami Paper Mills |
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314 |
23.2 |
2.1 |
26.0 |
0.8 |
15.6 |
1.2 |
51.95 |
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Writing Printing Paper |
12 |
4,329 |
17.6 |
1.2 |
10.1 |
0.8 |
17.9 |
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Paper Industry Compo |
40 |
8,061 |
19.8 |
1.4 |
9.0 |
0.7 |
15.9 |
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Market Composite |
2,982 |
6,997,711 |
18.5 |
3.1 |
35.0 |
1.9 |
23.1 |
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Servalakshmi Paper |
Hi-Band |
125 |
– |
1.6 |
2.9 |
0.7 |
5.9 |
0 |
29 |
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Lo-Band |
121 |
– |
1.5 |
2.7 |
0.7 |
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27 |
Concerns
- Maiden public venture of the promoters who also run three more companies in paper business which could lead to conflict of interest
- Cyclical industry Group paper companies’ profitability is abysmally low
- Remaining export obligation of Rs 99 cr, though reportedly achieved an export of Rs 8.5 cr up to October, 2010.
- First year of operation, yet to see a bottom line there by making dividend return a distant dream
- Well established listed paper companies like Tamil Nadu Newsprint and JK Paper are currently discounted less than 6 times their earnings and 1.5 times their net worth.
Conclusion
Given the current working of Servalakshmi, the company’s current offer price of Rs 27 to Rs 29 is unlikely to fetch any immediate returns. Moreover, when another Tamil Nadu company of well repute is available at less than 6 P/E offering a dividend yield of more than 3%, why go for a new company whose share prospects are uncertain in the near term?