RAVI KUMAR DISTILLERIES

Ravi Kumar Distilleries is entering the capital market on 8^th December 2010 with a public issue of 1.15 crore equity shares of Rs. 10 each in the price band of Rs. 56 to Rs. 64 per equity share. The company is expected to raise Rs. 64-74 crore via the IPO, which constitutes 47.92% of post-issue paid-up capital of the company and closes on 10^th December 2010.

Ravi Kumar Distilleries is a Pondicherry-based small-scale manufacturer of IMFL (Indian Made Foreign Liquor) with annual installed capacity of 14.25 lakh cases and 26,000 cases of excise bonded warehouse. The company has its own brand portfolio comprising 30 brands, besides undertaking tie-up arrangements for other companies. However, only 3 of its brands are registered in its own name.

Besides, presently the company has marketing presence only in a small market like Pondicherry, which is an open market, implying that the seller is free to choose distributor and determine price and discounts for its products. Going forward, company has plans to enter into the government-controlled markets of Andhra Pradesh, Kerala and Karnataka, where the going can get tough due to its lack of experience coupled with competitive threats by other existing and well-established players.

The company plans to utilize Rs. 11.2 crore from IPO proceeds, towards installation of re-distillation plant and to increase existing capacity at its Pondicherry plant from 14.25 lakh cases to 36 lakh cases per annum, by FY12. However, this expansion doesn't seem justified when the existing capacity is utilised only upto 50% at present and ramp-up has been quite slow in the past. Even its projected production of 12 lakh and 25 lakh cases in FY11 and FY12 respectively, seem too good to be true.

In March 2008, the company had purchased land for Rs. 15 crore in Madurai district, Tamil Nadu, from a group company, on which it plans to set-up manufacturing facility. Rs. 11 crore has already been advanced to the group company, appearing as capital work-in-process in its balance sheet. However, no mention of this expansion plan is detailed anywhere in the prospectus. What is the point of blocking such a huge sum of money in surplus land, that to, purchased from a group company, and then knocking the public doors to fund your expansion plans?

Besides expansion, company plans to utilise Rs. 3 crore for marketing and Rs. 34 crore for working capital. Balance Rs. 25.8 crore (assuming upper price band) will meet issue expenses and general corporate purposes. Funds deployed towards general corporate purposes may be more than 20% of the total issue size. This is in violation of existing listing laws.

For FY10, the company reported sales of Rs. 48 crore, of which 18% was sale of traded goods. Net profit of Rs. 2 crore was earned on equity of Rs. 12.5 crore, resulting in EPS of Rs. 1.60. For Q1FY11, results were flat with sales at Rs. 13 crore, with net profit and EPS of Rs. 59 lakh Rs. 0.47 respectively. As of 30^th June 2010, the company has contingent liabilities of Rs. 4.8 crore towards income tax matters and Rs. 2.2 crore is towards turnover taxes, which are quite high, considering its size and profitability.

The company's networth is just Rs. 15 crore, while it has mounting debt of Rs. 26 crore, which will remain after IPO as well. Post-issue, at upper price band of Rs. 64, the company is seeking an enterprise value of Rs. 179 crore, which do not seem justified by any means. The issue, being made at a pre-money PE of 40x and PBV of 5.2x, is definitely expensive.  

Even if its expansion crystallizes as per plan, the company will remain a regional play with limited scale of operations. Besides the issue is expensive with a heavy dilution, lacking fundamentals. Give this a miss, it won't get you 'high'!