By Geetanjali Kedia
Manpasand Beverages is entering the primary market on Wednesday 24th June 2015, to raise Rs 400 crore, via fresh issue of equity shares of Rs. 10 each, priced in the band of Rs. 290 to Rs. 320 per share. The company will issue 1.25 crore to 1.38 crore equity shares at the upper and lower end of the price band respectively, based on the price discovered, which will result in dilution of approximately 25-27%, based on post issue paid-up capital. The issue closes on Friday 26th June.
Manpasand Beverages manufactures fruit drinks under Mango Sip, Fruits Up and Manpasand ORS brands, focussed on rural India, which accounts for nearly 80% of revenue. Since mango drink sales is seasonal, Q1 and Q4 account for nearly two-thirds of sales. Till 31st March 2015, company had aggregate installed capacity of 70,000 bottles cases per day, at 3 manufacturing facilities (Vadodara, Varanasi and Dehradun), which has been augmented to 1.2 lakh bottles cases per day, post commencement of new Vadodara 2 facility from April 2015.
Extract of Financial Statements:
The seasonal skewness of business is so high that for nine months ended 31st December 2014, PAT reduced to Rs. 12.7 crore, vis-a-vis 4 months ended 31st July 2014’s PAT of Rs. 15.1 crore, although sales increased. Since company does manufacturing in-house, its depreciation charge of 6% to sales is higher than the industry benchmark of 1.5-2%. Also, cost of raw materials at 58-61% of sales is one of the highest in the industry, leaving limited headroom for margin expansion. Return on Capital Employed (RoCE) of about 13% also trails peers.
As of 31-12-14, equity stood at Rs. 37.55 crore while networth was at Rs. 180 crore, partly augmented by:
- Rs. 26.25 crore invested by Aditya Birla PE in Aug 2014 at an effective price of Rs. 233 per share
- Rs. 45 crore invested by SAIF Partners (investor since 2011) in Jun 2014, at an effective price of Rs. 206 per share.
Currently, 67.21% stake is held by the promoters, 29.79% by SAIF Partners and 3% by Aditya Birla PE. Total debt outstanding, as of 31-12-14 is Rs. 102 crore.
The IPO is being undertaken to fund:
- Rs. 153 crore greenfiled expansion at Haryana, with capacity of 50,000 bottles cases per day, to commence operations in Q4FY17
- Modernise Vadodara 1 and Varanasi plants with capex of Rs. 39 crore
- Rs. 101 crore loan repayment
- New corporate office at Vadodara for Rs. 23 crore.
While Haryana facility will contribute to financial from FY18 onwards, company will become near debt-free in FY16.
Given the seasonal nature, FY15 sales are likely to be approximately Rs. 350 crore, with an EPS of around Rs.7 per share, on equity of Rs. 37.55 crore. This discounts the issue price by PE multiples of 41 times and 46 times, on historic basis, at the lower and upper end of price band respectively.
Factoring in all positives surrounding new capacity of Vadodara 2 plant and ramp-up of Fruits up and Manpasand ORS brands launched in July 2014, estimated FY16 sales and EPS are expected to be at around Rs. 520 crore and Rs. 9.25, on expanded equity, respectively, which leads to PE multiples of 31x and 35x, at lower and upper end respectively, which is quite a stretch. While the company mentions no listed comparable peers, we can broadly evaluate it against other Indian FMCG companies, mainly Bajaj Corp:
*Based on closing price of 19-06-15, Rs. 320 per share for Manpasand
Bajaj Corp had gone public in Aug 2010 with a very concentrated product offering of just hair oils (similar to single product maker Manpasand) but enjoyed better margins due to its sizeable market share. For FY10, Baja Corp had reported revenue of Rs. 330 crore and net profit of Rs. 84 crore (25% net margin). It had priced its IPO at PE multiple of 20x, when peers ruled at PE of 25x then. However, Manpasand, despite similar topline but lower margins, has not left any discount to peers, which are much larger, having more established brands, both in rural and urban India along with better profitability.
Currently, Bajaj Corp, having added skin care range, not only has higher sales of Rs. 850 crore vis-a-vis Manpasand, but its net margins of 20%+ are also higher. When Bajaj Corp is trading at PE multiple of 31x, based on FY16E, Manpasand’s 35x (that too for primary market valuations, as some margin has to be left on the table for listing gains) is definitely aggressive! The latter’s current pricing seems to have factored in all future growth fully.
Makers of Real Juice (Rs. 1,000 crore brand), Dabur India, earns operating margins in mid-teens for juices and close to twenties for consumer care products, whereas Manpasand has single digit operating margins. Again, Dabur India’s non-seasonal portfolio justifies its slightly higher multiple.
While new capacity coming on stream and IPO being a 100% primary issue with no PE exit may be some positives for the issue, following factors weighing hard must not be over-looked:
- Very limited product portfolio comprising only of juices (even within juices, only fruit based juice drinks, no nectars or 100% juices). Moreover, its main product Mango Sip is a seasonal drink with peak season from Feb to May, other 8 months being quite flat.
- Company is building a separate distribution line for Fruits Up, which will have its own sets of challenges. Also, success of the new launch is yet to be proved. A company like Parle Bisleri has not yet been able to replicate success of Bisleri or Thumps Up with its new entrant Urzza.
- 100% tax breaks u/s 80IB(11A) for Vadodara 1 plant ended in FY15, while that for Varanasi shall end in FY16. These 2 facilities will get only 30% benefits from FY16 and FY17 respectively, which will shrink margins.
- Focus on rural markets can be a double-edged sword. Currently, ‘Bharat’ theme is out of flavor on the bourses. Be it two-wheelers, tractors, consumer finance, FMCG - all these sectors are facing headwinds as rural growth concerns loom.
To conclude, FY16 performance seems to be already priced in - Rs. 320 is definitely a high asking price, higher by atleast 15%, based on relative comparison and current macro environment. Secondary market conditions are so dim that most brokerages have cut EPS estimates and lowered Sensex targets for the next 12 months. In these conditions, one is better off parking their money in already listed players, due to limited headroom available in Manpasand from here on, as the issue seems fully priced.
Disclosure: Not applying in the IPO.