IPO News

Servalakshmi Paper IPO: Plant already commissioned. Zero gestation period

April 28th, 2011 Comments Off

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.

Future Ventures India: QIB issue closed for subscription

April 28th, 2011 Comments Off

Remains undersubscribed

Future Ventures India Limited QIB portion closed for subscription today but unfortunately remained undersubscribed. The QIB portion was subscribed a mere 26%. The QIB portion was 37.5 cr shares and received subscription for a 9.74 cr shares. The saving grace for the issue was the response from HNI’s who subscribed there portion by 5.12 times. This subscription has also helped the overall subscription reach 0.95 times on the penultimate day.

The good thing happening is that the really intelligent investor or the well informed investor who is called as the QIB is taking informed decisions. One hopes that the retail investor starts taking cues from the Qualified and intelligent bidders or “QIB”.

Future Ventures India IPO: Little or no scope for short term appreciation

April 27th, 2011 Comments Off

Confusing concept and business model – AVOID

Future Ventures India Limited is tapping the capital markets with its IPO which has opened on Monday the 25th of April and closes on Wednesday the 27th of April for QIB’s and on Thursday the 28th of April for non QIB bidders. The size of the issue is Rs 750 crs and the price band is Rs 10-11.

Price Band	Rs 10 – Rs 11
Offer size in shares	75,00,00,000 Equity Shares at Rs 10 to 68,18,18,181 Equity Shares at Rs 11
Issue Size	Rs 750 crs
QIB’s	37,50,00,000 Equity Shares at Rs 10 to 34,09,09,091 Equity Shares at Rs 11
Non Institutional Investors	11,25,00,000 Equity Shares at Rs 10 to 10,22,72,727 Equity Shares at Rs 11
Retail Investors	26,25,00,000 Equity Shares at Rs 10 to 23,86,36,363 Equity Shares at Rs 11
Book Running Lead Manager	Enam Securities Private Limited
	JM Financial Consultants Private Limited
Co-Book Running Lead Manager	Kotak Mahindra Capital Company Limited
	Edelweiss Capital Limited
	ICICI Securities Limited
Isssue Opening Date	Monday 25th April
Isssue closing date for QIB’s	Wednesday 27th April
Isssue closing date for other than QIB’s	Thursday 28th April
IPO Grade	CARE grade 3/5 indicating average fundamentals
Paid -up Capital Pre IPO	82,62,43,700 Equity Shares
Paid -up Capital Post IPO	157,62,43,700 Equity Shares at Rs 10 to 150,80,61,881 Equity Shares at Rs 11
Market Cap post listing	Rs 1,576.24 crs at lower band to Rs 1,658.87 crs at higher band
Bid Lot	600 shares
Bidding Amount for Retail	18,000 shares at Rs 11 or Rs 1,98,000 per application

Business
Future Ventures India Limited (FVIL) is a part of the Future group. The company seeks to create, build, acquire, invest in and operate innovative and emerging businesses in growing “consumption-led” sectors in India, which is defined as sectors whose growth and development will be determined primarily by the growing purchasing power of Indian consumers and their changing tastes, lifestyle and spending habits. Within the consumption-led sectors, we intend to focus primarily on opportunities in the business segments of (i) fashion, (ii) FMCG, (iii) food processing,(iv) homeproducts, (v) rural distribution and (vi) vocational education.

FVIL Investment Portfolio as of December 2010
			Rs in Crs
Name of Company	Business Description	Stake in %	Amt Invested


Indus League	Fashion Brands	85.70	382.80
Future Consumer Enterprise Limited	FMCG and Food	100.00	160.10
Aadhaar Retailing Limited	Retailing	70.00	77.40
Capital Foods	Ready to eat Food	41.00	45.10
Biba Apparels Pvt Limited	Fashion Brands	17.30	20.50
Future Consumer Products Limited	FMCG	90.00	20.00
SSIPL Retail	Retailing	7.00	10.00
Indus Tree	Green Apparel/home décor	52.50	9.60
AND	Women Apparel	22.90	5.70
Holi Accessories	Luxury Hand Bags	50.00	0.80

From the table above we find that the company has invested Rs 732 crs in various companies. From all of the companies as of date the clothing business of Indus League has reached of age and the business is mature in terms of sales, but is yet to reach the profitability that is expected of this business.

Objects of the Issue
The net proceeds of the issue after deducting issue expenses would be utilised for the objects of the issue. The objects of the issue are as follows: –

1.	To create, build, invest in or acquire and operate Business Ventures
2.	General Corporate Purposes

The company undertakes to utilise the Net issue proceeds within three years from the date of allotment of equity shares in the issue. In the event any part of the net proceeds is not utilised towards the objects of the issue within three years from the date of allotment of Equity Shares in the issue, the company shall distribute the unutilised portion of the Net Proceeds to the Shareholders of the Company as on the record date specified for the same, subject to compliance with the Companies Act and other applicable provisions of law.

Financials
The companies financials at this point of time are nothing much to talk about. They are appended below and the sales from retail merchandise have improved dramatically in the current nine months ending December 2010 from a level of Rs 124 crs in March 2010 to Rs 371 crs now. If one were to annualise the nine months numbers we are talking of a sales number of roughly 500 crs or four times sales growth. The number seems impressive but when one looks at the profitability all optimism disappears. The company at the net level has yet to break even and is still reporting losses. In reality even with a fourfold increase in sales one expected profits but that hasn’t happened.

It is even more surprising to note that a company which is investing, mentoring brands and businesses has incurred losses in stock market activities. Why the need to be playing the market is intriguing and baffling. The company has incurred losses of Rs 1408.38 lacs in March 2009 and Rs 318.49 lacs in March 2010. It would sure be interesting to find out how this activity was concerned with brand and business nurturing or mentoring as it does not have any connection with the same even remotely. Even though in the current nine months there has been no trading why any trading happened in the previous two years.

	Year 2009	Year 2010	9 Months
			Dec-10
Sale of retail merchandise	12017.91	12389.36	37134.86
Income from investing activity	1004.72	733.36	716.51
Other Income	4.39	2297.73	246.55
Total Income	13064.47	17791.28	39970.24
Cost of Goods Sold	12523.05	124.17.64	28301.45
Total Expenditure	18180.19	19758.84	42145.31
Profit/Loss Before Tax	-5147.27	-1967.56	-2175.07
Net Profit/Loss After Tax	-5457.87	-901.03	-1467.67

Comparisons
It is difficult to compare this company as the business model is unique. It could also be said that it is fairly confusing. FVIL is not a Private Equity investor, it is not a manufacturer, nor is it in a strict sense a holding company. It is therefore not comparable with any other company in the listed space. This also brings about a concern that anything which is not comparable does not get its fair valuation. Anything which does not get fair valuation typically trades at a discount to fair value. I believe Future Ventures will be no different.

I would like to admit that I am unable to classify this company and at best it can be said as a venture capitalist or Private Equity Investorinterested in two verticals namely fashion and FMCG. Within the FMCG stable there is a special focus on food and toiletries.

Concerns
The group had launched an issue of Future Capital Holdings in which the investors have lost a bomb. The management believes that this issue is being offered at par to help the poor investor recover some of the losses of that issue.

The group has invested 100% in Future Consumer Enterprise Limited and 90% in Future Consumer Products Limited. These seem to be investments where the group is trying to fulfil its dream of “Be Indian, Buy Indian”. It’s a nice nationalist feeling which all people would support but there is a lot of effort and money required to establish a brand and the products. One hopes that the products that this company launches turn profitable at an early stage.

The net asset value or NAV as on 31st December 2010 is below the issue price and is Rs 8.94 per share. The price band of the issue is Rs 10-11 and even assuming that the issue is priced at the lower end of the band it would mean a premium of almost 10-11% at the lower band and almost 22% at the upper band.

Conclusion
It’s a difficult business and though there seems to be a concept which is being sold through this issue, it is difficult to imagine immediate returns for investors. One needs to be patient to expect returns from this company and the wait could be some time coming. Bigger returns could come if investments turn profitable and Future Ventures exits the business. Looking at current investments it appears that nothing of that sort is likely in the immediate near term.

Investment in the company for the short term looks risky as no returns are likely. If however one has a long term outlook exceeding 18 months, investment may be considered. One must also keep in mind, that post the IPO, the company would have a huge capital base of 150 cr shares. I recommend that investors looking for quick returns should ignore the temptation of applying for an issue at par and just avoid the issue.

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