Issue offers little scope for appreciation
C.Mahendra Exports Limited is tapping the capital markets with an IPO which has opened on Friday the 31st December 2010 and will close on Thursday the 6th of January 2011. The issue is for 1.5 cr shares in a price band of Rs 95-105.
| Price Band | Rs 95 – Rs 110 |
| Offer size in shares | 1,50,00,000 Equity Shares |
| Issue Size | Rs 142.5 crs – 165 crs |
| QIB’s | 75,00,000 Equity Shares |
| Non Institutional Investors | 22,50,000 Equity Shares |
| Retail Investors | 52,50,000 Equity Shares |
| Marketcap Post Listing | Rs 570 crs at lower band and Rs 660 crs at higher band |
| Book Running Lead Manager | YES Bank Limited |
| Anand Rathi Advisors Limited | |
| Isssue Opening Date | Friday 31st December |
| Isssue closing date | Thursday 6th January |
| IPO Grade | ICRA grade 2/5 indicating below average fundamentals |
| Paid -up Capital Post IPO | 6,00,00,000 Equity Shares |
| Bid Lot | 60 shares |
| Bidding Amount for Retail | 1800 shares at Rs 110 or Rs 1,98,000 per application |
This is the only book-built issue one remembers that is spanning over two calendar years. There has been only one other case in 2006 but that was in the case of a fixed price issue. The issue from Cambridge Technology Enterprises Limited opened on the 29th of December 2006 and closed on the 9th of January 2007.
Business
C.Mahendra as a group is an integrated diamond and diamond jewellery player encompassing sourcing of rough diamonds, trading of rough and polished diamonds, processing of diamonds, and manufacture of diamond jewellery. The company carries out all these activities through a group of 11 companies which are owned 100% by the parent company. The company has four broad activities and they are carried out by these 12 companies which includes the parent company.
The five broad activities are as follows: – 1) Sourcing and trading in rough diamonds. 2) Cutting and polishing if diamonds. 3) Manufacture of diamond jewellery. 4) Marketing and trading in cut and polished diamonds. 5) Marketing of diamond jewellery.
The company has two diamond processing facilities at Udhna and at Varachha, both in Surat with an installed capacity of 2,40,000 carats per annum. The company has its jewellery manufacturing unit in Andheri (E) in Mumbai.
The company is proposing to expand its facilities by setting up a new diamond processing unit at Gujarat Hira Bourse, SEZ, in Surat and a jewellery manufacturing unit in Mumbai. Both these units are expected to commence production by September and October 2011 respectively. The company has 827 employees as of 30th June 2010.
The company has marketing offices in Surat, Mumbai and New Delhi in India. Its international presence is in New York, Antwerp and Hong Kong. The company’s flagship brand is “CIEMME”. Currently the company sells it jewellery through 9 exclusive retail showrooms, one franchise and through shop-in-shop setups.
C.Mahendra is a sight holder of the Diamond Trading Company and is able to source rough diamonds directly from DTC and ALROSA. Besides these it also sources from Canadian, Russian and African mining companies.
Objects of the issue
| 1 | Setting up of a diamond processing unit at Surat | Rs 36.06 crs |
| 2 | Setting up of a jewellery manufacturing unit in Mumbai | Rs 23.64 crs |
| 3 | Setting up of retail outlets | Rs 30.00 crs |
| 4 | Finance Brand Development expenses | Rs 20.00 crs |
| 5 | Investment in capital of C.Mahendra BVBA | Rs 80.00 crs |
| 6 | General Corporate Purposes | XX |
Financials
C.Mahendra Exports Limited consolidated revenues of Rs 1,597.42 crs for the financial year ended March 2009 and Rs 1,865.29 crs for the year ended March 2010. In the first quarter ended June 2010, the revenue was Rs 677.44 crs. The net profit after tax for the period ended March 2009 was Rs 66.19 crs and a paltry Rs 5.97 crs for the year ended March 2010.The net profit for the first quarter ended June 2010 has improved dramatically and zoomed to Rs 40.38 crs. The company has reported an EPS of Rs 14.71 on the pre-IPO equity of 4.5 cr shares for the year ended March 2009; Rs 1.35 for the year ended March 2010 and Rs 8.96 for the first quarter ended June 2010.
Comparisons
The company has chosen to compare itself with three other companies namely Gitanjali Gems, Shrenuj & Company and Suashish Diamonds. The comparison matrix is by and large fair and puts C.Mahendra in fair light compared to its peers. Gitanjali is by and large the largest retail brand in the list and has consolidated sales of over Rs 6,500 crs for the year ended March 2010. As regards the other companies 2009-2010 has been a bad year for almost all diamond companies and things seem to be improving in the current year. Diamond business because of different countries, economic conditions and volatility in prices in a tough and low margin business has plenty of uncertainty. Its margins and profits are not easy to estimate as multiplying Q1into four and calculating profits for the year.
Risk factors
The biggest risk in this business is the volatile nature of rough diamond prices and the selling price of cut and polished diamonds. Diamond companies do well when economies do well and diamond companies make most money when global economies are doing well. This is a very capital intensive industry, having a very high working capital cycle. Total requirement of funds is high and though sales in rupee terms may be high, the absolute margins are fairly low. Being a high volume low margin industry, one wrong event can knock out the bottom line. There is a perception fear about the industry and people generally do not believe the balance sheets of companies in India involved in the diamond industry. This perception and the fact that diamond companies have in the past never been investor friendly makes this a neglected sector in the stock market and investors look to stay away from this sector. The last two issues from this sector namely Goenka Diamonds and Shree Ganesh Jewellery House have been mini disasters at the bourses. While Goenka Diamonds is trading at Rs 76.60 against an issue price of Rs 135, a loss of 43.26%, Shree Ganesh Jewellery House is trading at Rs 197.75 against an issue price of Rs 260, a loss of 24%. This was not considering the facy that the share made a low of Rs 107.10 and has recovered from there to the current prices. In recent times just one gem and jewellery company namely Thangamayil Jewellery has made money for investors. Its current share price is Rs 166.95 against an issue price of Rs 75 and the share is up over 122%.
Valuations
The share of C.Mahendra Exports limited is being offered at a price earnings multiple of between 6.46 times and 7.48 times its FY 09 earnings. If one were to ignore FY 2010 which was an aberration, based on Q1 ending June 2010, the earnings per share improves to Rs 6.72 for the quarter. On an annualised basis this would be a staggering Rs 26.88, but if we were to extrapolate on a conservative basis and expect the profit to be Rs 110 crs we would be talking of an EPS on a fully diluted basis post IPO to be Rs 18.33. Based on this expected earnings the share is being offered at a price earnings multiple of 5.18 times at the lower end and at 6 times at the upper end of the price band. On the offer price it does not leave much to appreciate simply because even assuming the profit to be roughly 2.75 times the Q1 profit, it leaves little for appreciation in the medium term.
The issue has opened for subscription on Friday and on the first day itself it has received bids for 48.18 lac shares which are 32% of the total shares offered of 150 lac shares. The issue getting subscribed may not be a concern and there may be some money made for the first hour flipper, but as history indicated this industry has not made money for the investor and there is nothing in this company which could change the trend.
Conclusion
The issue can be given the skip and many believe that well begun is half done. This issue is not the best way to start 2011. Avoid subscribing to the issue.
SEBI Disclaimer: – I do not intend to subscribe to the above issue.
