SIMPLY AVOID THE ISSUE
Ravi Kumar Distilleries Limited is tapping the capital markets with its IPO for 1.15 cr shares in a price band of Rs 56-64. The issue opens on Wednesday the 8th of December and closes on Friday the 10th of December.
| Price Band | Rs 56-64 |
| Issue size in Rs | Rs 64.40 crs at Rs 56 to Rs 73.60 crs at Rs 64 |
| Offer size in shares | 1,15,00,000 Equity shares |
| QIB’s | 57,50,000 Equity Shares |
| Non Institutional Investors | 17,25,000 Equity Shares |
| Retail Investors | 40,25,000 Equity Shares |
| Marketcap post issue | Rs 134.40 crs to 153.60 crs |
| Book Running Lead Manager | Comfort Securities Private Limited |
| Isssue Opening Date | Wednesday 8th December |
| Isssue closing date | Friday 10th December |
| IPO Grade | 2/5 by CARE Limited indicating below average fundamentals |
| Bidding Lot | 100 shares |
| Maximum Retail Bid in shares and amount | 3100 shares at Rs 64 Rs 1,98,400 |
Business
Ravi Kumar Distilleries Limited as the name suggests is in the business of manufacturing and trading of Indian Made Foreign Liquor (IMFL) under their own brand “Capricorn” as well as under tie-up arrangements with other companies. The IMFL currently made includes Whisky, Brandy, Rum and Gin. The company started with an initial capacity of 7,20,000 cases per annum or 60,000 cases per month or 5,40,000 litres monthly. The capacity was just about doubled in 2009 to 14,25,000 cases per annum or 1,18,750 cases per month or 10,68,750 litres per month. The company has an Excise bonded warehouse with a capacity of 26,000 cases. This bonded warehouse capacity means roughly six days production can be kept in the warehouse.
The plant is located in Puducherry or the Union Territory of what was formally known as Pondicherry. The company is also a trader of liquor and beer. It has a reasonable component of traded sales in its total business.
Objects of the Issue
The objects of the issue are as follows: –
| 1. | Expansion of the unit by increasing the existing capacity to 36 lakh cases per annum and installation of Re-distillation plant | Rs 1122.19 lakhs |
| 2. | Marketing and Corporate Branding Exercise | Rs 300.00 lakhs |
| 3. | Meet Incremental working capital requirements | Rs 3397.17 lakhs |
| 4. | General Corporate Purposes | |
| 5. | Issue Expenses |
Financials
The company has two segments of revenue namely of goods manufactured by the company and of goods traded by the company. Excise duty is very high in this business and is almost half the gross sales. For simplicity purposes sales have been considered as net sales only.
Total sales net of excise duty for the year ended March 2009 were Rs 4310.30 lakhs and Rs 5023.38 lakhs for the year ended March 2010. For the first quarter of the year ended June 2010, the net sales were Rs 1393.22 lakhs. The net profit for the period ended March 2009 was Rs 170.59 lakhs, Rs 199.46 lakhs for year ending March 2010 and Rs 59.04 lakhs for the quarter ended June 2010. The margins on total net sales were 3.95% for March 2009, 3.97% for March 2010 and 4.23% for the first quarter ended June 2010.
The jump in margins is not indicative of any change in trend but is more to do with the weather in India which turns hot and sultry in the summer months and the sale of beer which the company trades and does not manufacture go up. The EPS based on the pre-IPO equity of the company of 1.25 cr shares is Rs 1.36 for March 2009, Rs 1.59 for March 2010 and Rs 0.47 for the quarter ended June 2010 or on an annualised basis Rs 1.88.
The issue price is Rs 56-64 which means on a pre-IPO price, the PE multiple is 35.22 – 40.25 based on March 2010 numbers and 29.78 – 34.04 times based on first quarter ended June 2010 annualised basis.
Comparisons
The company has chosen to compare itself with five different players namely Radico Khaitan, Tilaknagar Distilleries, Globus Spirits, Empee Distilleries and Jagatjit Industries. The lowest turnover is from Globus Spirits which as per the RHP of Ravi Kumar Distilleries is Rs 265 crs. Compared to Ravi Kumar this is almost 5.5 times. The net profit is Rs 28.5 crs which is 14.32%. In terms of net profit margins it is 10.75% in the case of Globus spirits, while it is 4.11 % in the case of Ravi Kumar. The price earnings multiple for Globus based on the earnings of Rs 14.20 is 11.9 while in the case of Ravi Kumar on the old capital it is a staggering 40 times. I believe one does not have to look too much into the issue to come to a conclusion that there is no comparison and there is hardly any future in investing in the IPO of Ravi Kumar Distilleries.
The expansion that the company is planning is likely to take about six months after the orders are placed. The capacity ramp- up and the increase in sales by entering the neighbouring states of Kerala, Andhra Pradesh and Karnataka would take about six months after production has stabilised. Considering all these facts it would be a correct assessment that the full benefit of expansion would be available in the financial year 2012-2013 when with the increased capacity one would expect the company to report a turnover of Rs 140-150 crs and a net profit of Rs 6-7 crs.
Valuations
Based on the fully diluted, post IPO capital of 2.4 cr shares, the EPS for March 2010 would be Rs 0.83 and for the first quarter ended June 2010 on an annualised basis at Rs 0.98. The PE multiple at the lower end would be 67.46-77 times based on March 2010 numbers and between 57.14-65.30 times based on March 2010-11 annualised earnings.
Even if one were to consider the two year forward earnings of Rs 7 crs the PE ratio for year ended March 2012-13 would be between 19.2 and 22 times. In a nutshell there is absolutely no justification for investing in a company based on two year forward earnings which is almost double the present valuation of Globus Spirits.
Conclusion
There is no way one can justify the valuations being asked for, by Ravi Kumar distilleries. Drink or no drink, business is good, but valuations and asking price are out of place and simply not in sync with the company fundamentals.
SEBI Disclaimer: – I do not intend to subscribe to the above issue.
