Print play

IPO REVIEW

Repro India the integrated, the end-to-end printing service provider, is tapping the equity market with a public issue. The business model of the company is to cater for clients in varied businesses. This helps de-risk the company's earnings.

Further the company's foray into the international market in the last few years will help it to capitalise on the increasing trend of outsourced business by large markets in United States of America and UK especially to low cost economies like India.

Content process outsourcing will be another key driver in the future for the company. However, there are concerns about the inconsistent performance on the financial front and negative cash flows in the past due to higher debt and inventory.

Further the issue proceeds are to be utilised for a greenfield project and expansion of the existing facilities. The return on this investment depends on the company's ability to repeat its topline and bottomline performance in the recent past.

Outsourcing opportunity

The company is in the integrated printing business and has a business model catering to the needs of various services thus helping to diversify its revenues. The business of the company is generated mainly from the publication, software and corporate clients.

Vinod Vohra, Chairman of the company, says, "We have developed our segments and products in such a fashion that it caters to the needs of the three major user groups of our services - publishing houses, corporates and software companies". The company has some major clients in each industry it caters to. The company's clients include Oxford University Press, Tata Steel, Nokia and Microsoft.

Repro's integrated approach in printing helps it meet the strategic objectives of the client rather than being a mere vendor. The services range from designing, sourcing and procurement, printing and production, warehousing, assembly and despatch to customer promotions.

Further Repro's experience in using global manufacturing and its expertise to understand client's business enables it to conceptualise and configure manufacturing at the higher end of the business solutions.

Repro expanded its reach by exploring overseas market only two years back after witnessing flat growth in the domestic growth. For the past two years the contribution of exports have rose from 12 per cent in FY04 to 30 per cent in FY05.

In the HIFY06 the contribution was 35 per cent. Repro has presence in international market largely in publication segment with presence in United States, UK and Africa.

Another encouraging fact is that the US (revenues of Rs 7,17,647 crore) and UK market (revenues of Rs 2,28,984 crore), major contributors in printing business worldwide are increasingly looking at outsourcing and increasing part of their demands especially from low cost economies like India. This should benefit the company going forward.

Content process outsourcing will be another driving force in the future as content services are emerging as a potentially large BPO service. There is a large potential given India's low cost talent pool, domain and English language knowledge and design and creative capabilities.

The proceed of the IPO are to be utilised to expand the capacities to meet the growing needs of the client. The proceeds of the IPO are to be invested for the expansion of the current facilities and a green field project at Navi Mumbai.

Negative cash flows

The printing industry has grown at a CAGR of 14 per cent since 1989. However, with the arrival of the internet and net based facilities, the pace of growth of the printing industry is not expected to be the same, point out analysts.

Paper is the key raw material for Repro constituting 74.6 per cent of the total raw material cost. Any upward movement in paper prices may adversely impact the financials of the company.

Moreover, the company gets 42 per cent of its revenues from fixed contracts. Hence, it restricts the company from passing on variations in raw materials to its customers.

Further, Repro has maintained high inventory cost and a consistent increase in debts (the company mentions it as capital expenditure cost). The inventory cost for FY05 was Rs 4.47 crore and for HI FY06 it was Rs 2.25 crore.

This had an impact on the cash flows. For FY02 and FY03 the negative cash flows stood at Rs 1.40 crore and Rs 0.6 crore respectively. For FY05 the negative cash flow was Rs 4.50 crore.

Repro relies only on a few clients. Though the company maintains it as a part of its strategy, the loss of few customers may affect its prospects in an adverse manner as more than 35 per cent of the revenues were contributed by its top five customers in FY05 and H1FY06. "The company draws revenues from few clients and if the orders are not repeated the financials may come under stress," said an analyst from a domestic brokerage house.

Stretched valuations

The topline growth for the company was 10-20 per cent in the five year period starting 2001, barring few exceptions in FY04 when the company's sales growth was just six per cent. The net profit of the company had dropped consistently from financial year 2000-01 to FY 04 but grew decently in 2004-05 by nearly 25 per cent.

Having said that for the FY06 sales are expected to grow by 25 per cent y-o-y based on the annualised half-yearly earnings. For HI FY06, the net profit was Rs 5.01 crore compared Rs 4.46 crore for the full year FY05.

On the basis of the earnings in FY05, the price to earnings ratio on the pre-issue basis is 29.07x at the higher end and 25.55x at the lower end. The valuations are higher compared to other companies in the similar industry. 
 

FINANCIALS
In Rs crore	FY05	FY04	% change
Net sales	86.64	81.54	6.25
Other income	0.33	0.29	13.79
Total Exp	78.49	75.07	4.56
Operating profit	8.15	6.47	25.97
OPM (%)	9.41	7.93	147bps
Net profit	4.46	3.55	25.63
NPM (%)	5.15	4.35	80bps
EPS (Rs)	5.68	4.52	-

For instance Macmillan India commands a P/E of 20.8x and Navneet Publications has a P/E of 15.7x. However, Macmillian India operates in publication of general books and a major player in English language teaching publications while Navneet publications is a top player in educational books and publications. This makes a strict comparison of these players with Repro difficult.

Issue closes: December 1, 2005