While Raj Oil Mills has drawn up mega capex plans, intense competition in the business and expensive valuations are concerns
Raj Oil Mills, which is a small sized company operating in the edible oil space, is entering the capital market to fund its growth plans and to tap the opportunities in the business. The company intends to raise Rs 95-114 crore, which it plans to use to increase its capacities and foray into newer geographies.
Business model
The company has a reasonably diversified portfolio of edible oils including ground nut oil (accounts for about 56 per cent of its revenue), coconut oil (14 per cent), sunflower (10 per cent) and mustered oil (5 per cent). The company managed to build this portfolio with limited resources as it concentrated to invest in refining and marketing capabilities in the business (limited crushing capacity).
| ISSUE DETAILS Issue price | |
| Upper band | Rs 120 |
| Lower band | Rs 100 |
| Issue size | Rs 95-114 cr |
| Issue opens | 20-Jul |
| Issue closes | 23-Jul |
Growth plans
To fill this gap, the company is now increasing its crushing capacity from a mere 5,000 tonnes currently to 1,40,000 tonnes. It is also increasing its filtering capacity from 30,000 tonnes to 2,50,000 tonnes per annum.
The new capacities are expected to be commissioned by November 2009. While these plans are ambitious plans, it will help the company in backward integrate (resulting in cost competitiveness) and enter into new markets. The company currently generates 60 per cent of its revenue from Maharashtra and another about 25 per cent from the Gujarat region.
Key concerns
Although the company intends to enter into other geographies like north and eastern India and leverage some of its well known brands such as Cocoraj (coconut oil) and Guinea (groundnut and mustered oil), investors need to be watchful as the company’s success will depend a lot on how well it takes on the competition.
In its offer document, the company has envisaged a total expenditure of Rs 9 crore on brand promotion and marketing, and expansion of its distribution network.
Needless to say, these markets are flooded with many small and big companies including the likes of Ruchi Soya, KS Oils, Rei Agro and Sanwaria Agro among others. And notably, most of these companies have already drawn up aggressive plans to increase their capacities and grow through branded sales.
| IMPROVING MARGINS | |||
| in Rs crore | CY06 | CY07 | CY08 |
| Sales | 110.3 | 217.4 | 317.7 |
| EBIDTA (%) | 10.7 | 13.4 | 16.5 |
| Net profit | 6.7 | 18.2 | 29.6 |
| Source: Company RHP | |||
Outlook
Overall, while there is opportunity for Raj Oil Mills to capture business in these markets, it is likely to accrue in a gradual manner on the back of investment and efforts towards marketing and distribution.
Since the business is working capital intensive, wherein the credit period to wholesale customers is roughly 2-3 months (20-25 per cent of sales), incremental sales would mean higher investment in working capital. Thus, even as competition is stiff, how fast the company can exploit its new capacities into actual sales needs to be closely watched.
The IPO price-band of Rs 100-120 per share values the stock at 12-14.5 times its CY 2008 earnings, based on the post-issue capital. Since any meaningful contribution to earnings from new capacities will materialise from 2010-11 onwards (and the high capacity utilization of over 90 per cent for existing capacity), earnings growth in the current fiscal (estimated at 10-15 per cent) is unlikely to match past trends. Given this background, the small size of company’s operation and a highly competitive industry, valuations are expensive.
That the rating agency ICRA has graded the IPO at 2 on the scale of 5 indicating below average fundamentals of the company also does not provide any comfort.
