Tara Health Foods has entered the capital market on 28th April, 2010 with a public issue of 1 crore equity shares of Rs.10 each, in the revised price band of Rs. 175 to 185 per share, down from Rs.180 to Rs.190 per share earlier. The closing date of the issue has also been extended till 5th May, 2010. Since the price reduction is too meagre, the issue is still an avoid, even at the revised price band.
The company is a solvent extraction unit, presently having 250 TPD solvent extraction plant, 120 TPD edible oil refinery and 500 TPD cattle/ poultry feed plant (250 TPD - 2 plants) in Punjab and Uttaranchal. Of these 4 units, only one unit being 250 TPD cattle/ poultry feed, having made operational in February 2007 and located in Uttaranchal, is entitled for 100% income tax exemption for first five years under section 80 - IC and 100% excise exemption for 10 years. So bottomline, which was quite meager till FY07, suddenly shot up in FY08 to 9M of FY10. In FY08, tax liability of the company has been at around 12 percent, while it was at 11 per cent in FY09 and at 16% in 9 months of FY10. So does it mean that major chunk of profit is coming in only from 250 TPD cattle feed plant located in Uttaranchal, a tax free zone while other 3 plants are not contributing much to the bottomline of the company? As such, 100% tax exemption of this unit will expire in March 11, while new unit, being set up at Malerkotla in Punjab, would not be entitled for such benefits.
The company is now setting up an edible oil refining plant of 300 TPD and cattle feed plant of 250 TPD, as also augmenting long term working capital requirements. All this is estimated to cost Rs.170 crores excluding issue expenses and funds for general corporate purposes. All this is going to get financed from IPO.
It may be seen that the working capital requirements of the company is very high as evident from inventory and debtors of Rs.196 crores, as at 31st December, 2009, on total income of Rs.243 crores, for 9 months ending 31st December, 2009. This represents over 7 month sales. This is partly financed by working capital finance of Rs.107 crores while balance of Rs.90 crores from net worth and creditors. Due to this, net block of Rs.56 crores is still financed by term loan of Rs.33 crores, as on 31st December, 2009. So, there is hardly any room for any money coming in from internal accruals, in case of delay, over-run or short fall. As such there is no substantial progress on the proposed expansion, as all the funds are to be mobilised from the IPO only. It is also most likely that even if the company succeeds in successfully completing the IPO, new project won't be operational in FY11.
For FY09, the total income of the company was at Rs.198 crores with PAT at Rs.17 crores, giving a PAT margin of 8.60%. In 9 months ending 31st December, 2009, PAT is placed at Rs.36.30 crores on total income of Rs.243 crores resulting in a PAT margin of 14.95%. Is this the magic of IPO? In normal circumstances, FY11 should be able to post a topline of Rs.350 crores with PAT of Rs.30 crores, which also happens to be its last year of 100% tax exemption for Uttaranchal unit. This will translate into an EPS of close to Rs.10 on expanded equity of Rs.30 crores, which results in issue at a PE of 18 to 19 times. Even if we double the EPS, still EPS works to 9 to 9.50 times, against PE of 7 times of Raj Oil Mills which is expected to have an EPS of Rs.9 on topline of Rs.400 crores for FY10 on equity base of Rs.36 crores. Even Murli Industries, expected to have an EPS of Rs.44 for FY10 on topline of Rs.600 crores, is ruling at Rs.96, a PE of about 2.2 times.
Considering all this, issue has no substance as it is grossly overpriced with many threats of better corporate governance, attracting higher tax rates, future prospects and long gestation of new projects. Clearly, avoid it, even at the lower price band, and look to buy peers available much cheaper in the secondary market.