C. Mahendra Exports has entered the capital market on
It appears that the company is undertaking the IPO in a hurried manner, so as to avoid presenting financials for H1FY11. Since SEBI guidelines require updating IPO prospectus with audited statements, not more than 6 months old from issue opening date, the company is presenting financials upto
C. Mahendra Exports is an integrated diamond and diamond jewellery player, with 2 diamond cutting and polishing facilities in
1. Investment in subsidiary to increase procurement of rough diamonds - Rs. 80 crore
2. Establish a diamond processing unit in
3. Establish diamond jewellery manufacturing facility in Mumbai, to be operational by October 2011 - Rs. 24 crore
4. Establish 15 retail outlets upto FY 13, in India- Rs. 30 crore
5. Brand ("Ciemme") development expenses - Rs. 20 crore
To meet the expanded capacity, the company will need additional working capital, funding of which is not accounted above. The business is very working capital intensive, as can be seen from the latest financials - debtors outstanding for 9.6 months while inventory outstanding for 4.7 months, as of
A large part of internal cash flows will go towards the above 5 objects itself, as planned expenditure above (excluding general corporate and issue expenses) aggregates to Rs. 190 crore, while the issue will mop-up a maximum of Rs. 165 crore, considering upper price band of Rs. 110. Thus, additional working capital will, to a great extent, be funded through debt. This will put added pressure on the balance sheet, which is already quite leveraged, with present debt-equity ratio of 2.5:1, as debt outstanding (
Coming on to its financials, for FY10, the company reported sales of Rs. 1,853 crore and earned PAT of only Rs. 6.1 crore, largely due to huge forex losses of Rs. 50.3 crore. Q1FY11 sales was Rs. 736 crore and net profit rose to Rs. 40 crore, thanks to decrease in raw material cost. Raw material cost as a percentage of sales declined to 79% in Q1FY11 from 88% in FY10. However, it remains to be seen if this trend can be sustained,as it is difficult to rely on one quarter results. Most of company's rough diamond procurement is through secondary market purchases. Primary sourcing of diamonds, from DTC and ALROSA, accounts for about 20% only.
Another point which will dent future bottomline is the expiry of income tax benefits, which the company is presently enjoying for its key
Currently, contribution of diamond jewellery business, which earns higher margins for gems and jewellery companies, is very low at 3.4% in FY10 and only 2.3% in Q1FY11. The growth of this vertical will also be at a slow pace, since ramp up of retail outlets is not very aggressive. Company is adding 15 new stores in next 27 months, from current 10 stores. Thus, visibility of improved margins is not very high in the immediate future.
We advise against the issue, as fundamentally-stronger companies in this sector, like Gitanjali Gems and Shree Ganesh (to name a few), are available at much attractive valuations, in the secondary market. Better to avoid this issue, to begin a Happy New Year 2011!