Uncharted territory

SPECIAL REPORT

Volatility in markets and the present low penetration of Shirdi Industries' proposed products make the issue less attractive.

Everybody wants a piece of the action unfolding in the booming construction sector.

While a lion's share of the vertical outgrowth is cornered by cement, engineering, steel and paint companies, a substantial market has opened up for firms that make composite or processed wood products.

One such is Mumbai-based Shirdi Industries which is setting up a large, integrated plant to manufacture Medium Density Fibre (MDF)/particle boards. These products are used in making cabinets, doors, showcases and furniture.

Seeking funds
The company plans to raise Rs 45-50 crore in the price band of Rs 69-78 per share to manufacture 48.6 and 50.5 lakh square feet of MDF and particle boards respectively. 50 and 70 per cent of MDF and particle boards would be converted into value-added products such as prelaminated boards.

The company will also make decorative laminates, flooring, doors and furniture components. The issue, which closes on July 5, will form about 40 per cent of the total project cost of Rs 127 crore while the balance will be funded by loans and internal accruals.

Over 50 per cent of the total cost of he project has already been spent and commercial production will start in December 2006.

Stiff valuations
At the lower end of the price band of Rs 69, the company is valued at 28.5 times and at the higher end at 32.3 times on the basis of FY06 earnings.

According to analysts' estimates, the issue is valued at 14.4-16 times for FY07E and 3.5-3.9 times for FY08E on diluted earnings. The company has limited experience in manufacturing as it started producing panel doors, door skins and furniture components at Navi Mumbai in 2003.

However, it has improved its share from nothing to 26 per cent in the last three years. The share of MDF/particle boards in the total consumption pie is small. So, investors will have to wait for some time before these products make a dent in the processed wood business. 
 

FINANCIALS
(Rs crore)	FY06	FY05	% chg
Net sales	51.74	40.32	28.32
Operating exp	45.43	37.91	19.84
Operating profit	6.31	2.41	161.83
OPM (%)	12.20	5.98	622bps
Net profit	4.51	1.33	239.10
NPM (%)	8.72	3.3	542bps
Bps-basis points

Competitive edge
The company claims to be able to produce MDF/particle boards at 60 per cent of the landed costs due to various advantages of location of the integrated plant in Uttaranchal like easy access to raw material, cheaper power (up to 50 per cent less than that in other states) income tax and excise duty exemptions.

Further, value-added products would help rationalise costs.