Present size and asking price make issue very expensive

Timbor Home Limited is tapping the capital markets with its IPO for 36.9 lac shares in a price band of Rs 54-63. The issue opens on Monday the 30th of May and closes on Thursday the 2nd of June.

Business
Timbor Home Limited is in the business of manufacturing modular kitchens, readymade doors and furniture. The company has three manufacturing units located in Vatva industrial estate in Ahmedabad where stainless steel kitchen baskets and accessories are manufactured. The unit at Chagodar near Ahmedabad makes kitchen and furniture, while the unit at Umreth in Anand district does wood processing and makes wooden doors.
The company sells its products under the brand names Timbor Cucine, where modular kitchen is sold, Timbor Doors where doors and door frames are sold and Timber Home where home furniture is sold. It also has an upmarket kitchen brand IKI Kitchens where it sells hi-end kitchen solutions using Hettich hardware and accessories.
The company has 2 lac square feet of manufacturing capacity at its three units on a combined basis. The company currently operates 84 stores in 65 cities through franchisees. It has also opened two stores in Reliance Fresh outlets in Jaipur and Surat. It also has 4 company owned stores which makes the total outlet strength to be 90 stores.

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

Financials
The company has reported sales of Rs 26.67 crs in March 2009, which have grown to Rs 51.04 crs in March 2010 and to Rs 54.83 crs in the nine months ended December 2010. The net margins have been at 4.38% in 2009, 3.48% in 2010 and have improved to 5.56% in the nine months ended December 2010. The improvement in December 2010 is on account of a change in accounting policy where no tax has been paid for the nine months. Assuming that the company paid the full tax, the net margins would have been at 3.72%.

The sundry debtors have gone up dramatically in the nine month period ending December 2010 from Rs 18.70 crs for the period ended March 2010 to Rs 37.20 crs in the nine months ended December 2010. The company has done some bulk sales and has extended credit to its franchisees for increasing market penetration which has resulted in higher debtors but they are all considered good.

Comparisons
The company has compared itself with plywood manufacturers like Greenply Industries and Archidply Industries. These companies are not comparable as the core business of these companies is selling plywood, veneer and wood products which are raw materials for furniture manufacturers. Timbor processes its own wood and saves on the margins which would accrue if the processed wood is bought from manufacturers. Its strength is in also being able to using the waste and effectively using every piece of wood. Secondly the people who sell furniture are not in the listed space or are a mere division of the listed entity. Shoppers Stop a listed entity has a division which sells furniture but it is a trader in furniture and does not manufacture the same.

Valuations
The EPS of the company on annualised basis considering the tax payment would amount to Rs 2.47 on pre-IPO capital of 110.6658 lac shares. This would amount to a price earnings multiple of 21.84 times at the lower price band of Rs 54 and 25.5 times at the upper price band of Rs 63.
If one were to consider the EPS on a fully diluted basis the same would reduce to Rs 1.85 and the price earnings multiple would increase to a band of 29.19 times at the lower band and 34.05 times at the upper band.

Conclusion
The business model is not only interesting but looks one that would pick up and become extremely popular going forward. The ultimate aim or target audience for the company is the lady who cooks sitting on the ground on a “Chula” (fireplace) using coal or wood. The opportunity is immense. It would take time to reach a level where penetration is deep and the turnover starts increasing rapidly. Seeing the opportunity and potential two large newspaper chains the Bennet Coleman group and the Bhaskar group have both entered into barter deals valuing the company substantially higher than the current valuation at which the shares are being offered. 
The company is planning to add 20 stores with the money and is raising 400 lacs for the same. Once these stores become operational it would add to the top line and bottom line significantly. It appears the company is reaching an inflexion point and is all poised to enter the next stage of growth.
I like the business model and the growth plans of the company but believe that the present size and the asking price make it difficult to recommend anybody to subscribe to the issue. Secondly being a very small issue there are concerns about liquidity once the same is listed.
I suggest skipping the issue at the present moment and relooking the issue post listing and once two more quarterly results are available. The company would certainly be on my radar as a potential performer post listing.

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