Apply for the medium and long term
Servalakshmi Paper Limited is tapping the capital markets with its IPO to raise Rs 60 crs in a price band of Rs 27-29. The issue has opened on Wednesday the 27th of April and closes on Friday the 29th of April.
| Price Band | Rs 27 – Rs 29 |
| Offer size in shares | 2,22,22,222 Equity Shares at lower band to 2,06,89,655 Equity shares at higher |
| Issue Size | Rs60 crs |
| QIB’s | 1,11,11,111 Equity Shares at lower band to 1,03,44,828 Equity Shares at higher band |
| Non Institutional Investors | 33,33,333 Equity Shares at lower band to 31,03,448 Equity Shares at higher band |
| Retail Investors | 77,77,778 Equity Shares at lower band to 72,41,379 Equity Shares at higher band |
| Book Running Lead Manager | Keynote Corporate Services Limited |
| Indian Overseas Bank | |
| Isssue Opening Date | Wednesday 27th April |
| Isssue closing date | Friday 29th April |
| IPO Grade | ICRA grade 2/5 indicating below average fundamentals |
| Paid -up Capital Pre IPO | 2,24,24,000 Equity Shares |
| Paid -up Capital Post IPO | 4,46,46,222 Equity Shares at lower band to 4,31,16,665 equity shares at higher band |
| Market Cap post listing | 120.54 crs at lower band to Rs 125.03 crs at higher band |
| Bid Lot | 200 Equity Shares |
| Bidding Amount for Retail | 6,800 shares at Rs 29 or Rs 1,97,200 per application |
Business
Servalakshmi Paper Limited is in the business of manufacturing printing and writing paper and newsprint. The production is done on a state of the art production unit situated at Kodaganallur Village, Tirunelveli district, Tamil Nadu. The installed capacity of the plant is 90,000 metric tons per annum. The plant has gone into commercial production in April 2010 and the plant is now stabilised and running satisfactorily.
The company is promoted by the SERVALL group which has been a part of the paper industry for more than four decades. The group is in present in all the verticals namely paper machinery manufacturing, paper manufacturing, project consultancy and turnkey project implementation.
Servalakshmi has a 90,000 tonnes per annum plant which is one of the largest single location plants in India. It has also set up a co-generation power plant of 15MW capacity to supply uninterrupted power and steam to the plant. The company is selling excess power to the grid. The co-gen plant is a multi-fuel plant and also uses the solid waste from the effluent plant as boiler feed. This ensures that there is no disposal problem or issue of effluent with the company. Paper mills need a large quantity of water and the new environment laws do not allow any discharge of water into the land. With this objective and directive Servalakshmi has a land admeasuring 340.385 acres. All the water after being treated is either recycled or used in this huge land.
The raw material for paper production at Servalakshmi is used newsprint and waste paper. They use 90% or more of recycled fibre and have received the Forest Stewardship Council (FSC) Certification. This is a unique requirement for export of paper to USA and Europe and products manufactured from paper having this certificate enjoy a premium in price over others.
The plant has stabilised and is currently running at a run rate of between 5,800 to 6,000 tons per month depending on whether it is newsprint or writing and printing paper and also the grammage or thickness of the paper. The machine has a capability to produce paper from 40 gsm to 110 gsm.
Objects of the issue
The objects of the issue are as follows: –
| 1. | Purchase of Equipment for value added products | Rs 2500 lacs |
| 2. | Long Term working capital requirement | Rs 3000 lacs |
| 3. | Preliminary & Pre-operative expenses including IPO Expenses | Rs 500 lacs |
| TOTAL Cost of Phase II | Rs 6000 lacs |
Financials
The company has gone into commercial production only in the first quarter of 2010 and had no commercial activity prior to that. All expenses at that time were related to the project implementation. In the year 2010-11, the company has given financials for the first seven months ending October 2010. The revenues for seven months are Rs 52.54 crs and there is a profit of Rs 2.316 crs before depreciation and tax. The company has provided depreciation of Rs 4.49 crs for the period and paid interest of Rs 12.72 crs for the period resulting in a net loss of Rs 14.90 crs.
Currently the machine is running satisfactorily and is producing between 5800-6000 tons per month. This production would further improve in the next two quarters and would improve substantially by the end of the year when the balancing equipment is installed. At this rate of production the company is not only cash positive but is able to provide for interest and depreciation as well.
It would be fair to assume that though the company has lost money in the year 2010-2011, there would be positive contribution in the year 2011-12 looking at the current production and paper prices.
Comparisons
Servalakshmi has compared itself with Emami Paper Mills, Seshayee Paper, Star Paper, Rainbow Paper, SreeSakthi Papers and N R Agarwal Industries. The business of paper making has been tough and there are a large number of small players in this business. Ever since the Supreme Court has taken a tough stand on pollution and environment issues, there have been closures of many of these small units. The demand for paper has been growing around 6% in last few years and is now projected to grow around 7.6%. Servalakshmi compares favourably with the competition and importantly has the size to boast of.
Valuations
The company is offering shares in a price band of Rs 27-29 and at the upper end of the price band the market cap post issue would be Rs 125 crs. The total debt of the company is Rs 262 crs which makes the enterprise value at Rs 387 crs or means a value of Rs 43,000 per ton of paper capacity. The recent deal done by International paper in buying a stake in A P Paper values integrated mills at roughly Rs 1.1 lakh per tonne, and Rs 0.55 lakh per tonne for paper producing capacity. IF we were to consider the expansion and addition of balancing equipment, Servalakshmi would have an enterprise value of Rs 447 crs for a capacity of 1,08,000 tons or Rs 41,388 per ton which leaves a substantial scope for growth.
One must also remember that paper mills have a gestation period and it takes times for mills to stabilise production and quality. In the case of this company all these things have already happened and the company is supplying newsprint to leading newspapers. The industry has a bright future and the fact that this industry needs scarce natural resources as its raw material, or waste paper for the manufacture of paper makes it viable and economical.
The fact that the company has a power plant which has excess capacity which is being sold to the grid, is generating resources and will help in achieving a healthy bottom line.
Conclusion
I believe that investors who have a medium to long term perspective and believe that post the A P Paper deal, the entire paper sector will see fresh investments and interest in the sector should apply.
SEBI Disclaimer: – I intend to apply to the above issue.
