Only on paper

IPO REVIEW

Sree Sakti paper is a small company with no unique proposition but its IPO is priced on par with larger players.

Higher export opportunities owing to removal of global textile quotas and government's favourable policy towards cotton textile players has encouraged many small textile firms to weave their growth plans. After Ginni Filaments Ltd's public offer of Rs 48 crore, Nitin Spinners Ltd.

If the industrial growth remains strong, there is no reason to believe that demand for industry paper will see good times. On top of this, the narrowing gap between demand and supply is only expected to bring back pricing power to companies.

Amidst booming stock markets, Sree Sakthi Paper Mills, a niche player in duplex board and kraft paper with less than 10 per cent market share in south India, is approaching investors with a Rs 25 crore IPO, to fund its expansion.

Although, sales growth and profitability was low in FY05, the management expects improvement on back of higher turnover and lower expenses. But, analysts find the issue priced at Rs 30 per share to be expensive, when bigger peers like JK Paper and West Coast Paper are trading at 11.7x and 7.6x, respectively.

The company would use the IPO proceeds to fund capacity expansion, primarily in kraft paper, from 140 tonnes per day to 240 per day and to set up a two megawatt co-generation power plant. Post-issue, the promoters' holding will reduce from 100 per cent to 49 per cent.

In FY05, Sree Sakthi posted a mere five per cent increase in sales to Rs 49.51 and net profit stood at just over Rs one crore. B Madhuprasad, vice chairman, Keynote Corporate Services (lead manager to the issue) explains that in the middle of 2004, the company installed a double coated machine costing Rs 3 crore for value added duplex board.

The production focus was shifted on the new variety, but neither the full benefit of the same could be derived in a few months, nor the normal volumes of the earlier duplex board could be achieved. This resulted in the lower growth in sales. Madhuprasad expects sales of about Rs 62 crore for FY06 and higher profitability, aided by excise savings due to VAT.

One definite concern is competition. Sree Sakthi faces competition from biggies, with JK Paper expanding into duplex board with 60,000 tonnes per annum capacity expected to be ready by Q1 FY07. ITC Bhadrachalam and West Coast are the other major players. Star Papers is the other player in kraft paper segment.

On an EPS of Rs 2.89, Sree Sakthi has a P/E of 10.38. Its senior peers also have attractive P/Es; JK Paper (11.7x), West Coast Paper (7.6x) and Star Paper (12.4x).