AVOID

RDB Rasayans Limited is tapping the capital market which has opened on Wednesday the 21st of September and closes today the 23rd of September. The comp[any is issuing 45 lakh shares in a price band of Rs 72 to 79 and would raise Rs 35.55 crs at the upper end of the price band. In the two days that the issue has been open, it has garnered support for a total of 0.08 times the IPO size. The company has received bids for 3.61 lac shares and all these bids are from retail investors. There is not a single bid from QIB’s or HNI’s at the end of the first two days.

Business
RDB Rasayans is a manufacturer of PP tape, PP woven sacks, woven fabrics, industrial woven fabric, PP woven fabrics and PP woven bags. These products are used in various industries for packaging purposes like the fertiliser industry, cement, polymers, chemicals, textiles, machinery, automobiles and steel industry. The company is engaged in manufacture and sale of FIBC (flexible intermediate bulk container) and woven sacks and various polymer based products like container liners, protective irrigation systems, which find large scale application in the segments like cement and fertiliser.

The company has an installed capacity of 7000 metric tons currently and the same is fully utilised. The proceeds of the issue would be utilised to increase the capacity further and make the same a total of 13,500 metric tons. The group is a diverse company and has interests in many businesses which make them vulnerable as the focus of the group is missing. For example they are into real estate, NBFC Company, electrical machinery manufacture and transmission business, flour business which has been converted into financial services company, automobile sales and services, construction activities, investment company, construction and real estate activity and so on. The group has multi companies in the same line of business and there is hardly a dividing line between one company and the other. Many of these companies are listed entities and hence minority shareholder would always feel cheated or let down. The important part is the group has no focus and this is a big concern.

Objects of the issue
The objects of the issue are as follows: –

The company plans to raise Rs 32.40 crs at the lower end and Rs 35.55 crs at the upper end. It has given a breakup of Rs 21.02 crs as the object of the issue and balance is mentioned as general corporate purposes and issue expenses. It appears top be a bit odd that such a large portion of the amount to be raised, the use is not specified.

Financials
The company reported a topline of Rs 29.95 crs in the financial year ended March 2009, Rs 29.97 crs in March 2010 and Rs 45.55 crs in March 2011. The net profit in the same period was Rs 1.95 crs, Rs 0.78 crs and Rs 1.80 crs. The net margins have been very volatile and have ranged from 5.57% to 2.6% and finally to 4%.

If one looks at the topline and the fact that the company is running to capacity currently, it becomes very clear that the expansion to 13,500 tons would at best make this a 85 cr to 90 crtopline company. Any company with that small a size and net margins of a mere 4% cannot command a market cap which is a multiple of its top line. Competitors are available at less than 0.4 times of turnover and one wonders why this company is asking for 1.56 times multiple of sales to marketcap.

Comparisons
The company has chosen to compare itself with Neo Corp, Polyplex, EsselPropack and Jumbo Bag, Polyplex and EsselPropack are in completely different lines of business and are not comparable in any manner. Neo Corp and Jumbo Bag are in the same line of business. Neo Corp has reported a topline of Rs 308 crs for the year ended March 2011, has a net profit of Rss 14.03 crs, a market capitalisation of a mere Rs 60 crs, and is available at a price earnings multiple of 4.30 times.

Jumbo Bag reported for the same period a topline of Rs 104 crs and a profit after tax of Rs 0.61 lacs and enjoys a market capitalization of Rs 14.35 crs. RDB Rasayans reported a profit after tax of Rs 180.31 crs which on a fully diluted equity of 177.14 lac shares would translate into earnings per share of Rs 1.01. At the lower end the price earnings multiple would be a staggering 71.28 times and at the upper end of the price band, 78.21 times.

Conclusion
The group is too diversified and has its hands in too many things which are not interconnected or form part of the same activity. This spreads their resources and focus too thin. The group has similar businesses in different companies and there would always be a clash of minority shareholders interest. Secondly the expansion envisaged by the company post the raising of equity at best would make this a 85-90 crtopline company, keeping it a small company. Post listing and declaring their results for the year ended March 2012, there would be no way a company in the woven cloth and sacks business could command a market cap which is 1.56 times its topline. The issue is expensive, exorbitantly priced and offers no returns to investors in the medium or long term. One should just avoid the issue, irrespective of whatever be the compelling reasons for investment.

Looking at the valuations, lack of focus and small size, I believe prospective investors must avoid the issue.

SEB I Disclaimer: – I do not intend to subscribe to the above issue.