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Tara Health Foods Limited is tapping the capital markets with an IPO which opens on Wednesday the 28th of April and closes on Friday the 30th of April. The issue is in a price band of Rs 180-190 and the issue is for 1 crore shares. The company would raise Rs 180-190 crs.

Business

The company Tara Health Foods Limited is in two businesses or segments. The first is health focussed edible oil which is meant for human beings and the second segment is animal nutrition or cattle feed. The company is located in Punjab and supplies its products primarily in Northern India and has now started catering even to the state of Bihar. The company has its plants in Malerkotla in Punjab and Sitarganj in Uttaranchal. The capacities or facilities at Malerkotla include 250 tons per day (TPD) solvent extraction plant, 120 TPD edible oil refining plant and a 250 TPD animal nutrition or cattle feed plant. In Sitarganj the company has a 250 TPD animal nutrition plant.

The current cattle feed capacity of 500 TPD (250 at Malerkotla and 250 at Sitarganj) is utilised to the extent of 92.3% in the year ended March 2009 and to the extent of 95.57% in the nine months ended December 2009. The solvent oil extraction is utilised in the same period to the extent of 39.3% and 50.52% respectively. In the case of edible oil there has been a dramatic increase in the utilisation of 26.2% in the year ending March 2009 now improving to 86.13%.

In edible oil the company’s main products comprise of rice bran oil, olive oil and a blend of rice bran oil and olive oil. Tara Health Foods Limited imports crude Olive oil and processes the same. In the case of rice bran oil, rice bran is the raw material and the same is available all over the state and adjoining areas in season. What is critical in this is the fact that rice bran which is obtained after rice polishing is a perishable product having a very small shelf life and therefore it needs to be converted into oil cake to increase the shelf life. Tara has the facility for doing so and is therefore able to conserve the raw material. It also buys crude rice bran oil from other manufacturers. The crude olive oil is processed and sold as it is but the best selling product of the company is the rice bran and olive blended oil.

In cattle feed, the key to success is measured in terms of the yield of milk that the buffalo or cow gives in comparison to the cattle feed that the animal is given. This helps in the quality and fat content of the milk. Tara sells all its cattle feed as a branded product and at a premium to its competitors. Its key strength is the research and goodwill that has been created amongst farmers. It is a well known fact that cattle if they don’t like the food served to them just don’t eat. This is a sort of testimony to the quality of the product sold by Tara.

Objects of the Issue

Financials

The company is in the growth stage and its capacities have now reached full utilisation levels leading the company to expand further. The revenues for the year ended March 2008 were Rs 106.11 crs while for the year ended March 2009 they were at Rs 198.24 crs. The sales for the nine month period ended December 2009 have risen sharply to Rs 243.22 crs. The net profit in the same period has been Rs 9.01 crs, Rs 16.99 crs and Rs 36.29 crs. The net margins have been improving as well and they were 8.5%, 8.6% and 15.2% respectively. If one were to annualise the nine month profit the same would be Rs 59.89 crs for the year ended March 2010.

Comparisons

There are quite a few solvent extraction plants but they are into processing of a commodity and their capacities are huge in comparison to what Tara does. In the cattle feed segment there are players like Cargill, Tata Chemicals and Chambal Fertilisers who are present in the same besides a huge number of small players in the unorganised sector. The company sells its products through Chambal fertilisers as well who mention the fact that the product is manufactured by Tara Health foods. The company is able to sell its products at a premium in the market compared to its peers. The company earned an EPS of Rs 4.50 for the year March 2008, Rs 8.48 for the year ended March 2009 and Rs 18.11 for the nine months ended December 2009 on the pre-IPO equity.

The nine months results if annualised would result into a profit of Rs 48.39 crs. The EPS on old capital would be Rs 24.09 and on a fully diluted basis would be Rs 16.10. The new cattle feed plant would add to the top line in the year 2010-2011 and one should expect a turnover of about Rs 480-500 crs and assuming that the margins are maintained at 15% we are talking of an EPS of Rs 23.96 to Rs 24.96 on a fully diluted basis.

Leaving aside the future just looking at the present numbers the IPO price of Rs 180-190 is a price earnings multiple of 11.18 times at the lower end and 11.8 times at the upper price band.

Key Risks

The key risk is the sustainability of margins and the same could be mitigated going forward as the company ramps up its production and thereby enhances its purchasing power of buying raw material during the season. Penetration of olive oil which is considered healthy and is entirely imported offers opportunity but risk in procurement. The final risk is that rice bran oil is easily available but is perishable. The conversion of oil into oilcakes is the key.

Conclusion

The company is into a very promising sector where the essence is health. Health of humans or health of cattle that provide milk, a key ingredient to making humans healthy is equally important. With low penetration currently, this looks a great opportunity going forward. Investors looking for steady appreciation must apply.