Tirupati Inks Ltd

Tirupati Inks has entered the capital market on 14^th September 2010 to raise Rs. 51.5 crore via the public issue, comprising of a fresh issue of 1.20 to 1.26 crore equity shares of Rs. 10 each (depending on the price at which the book is discovered). The issue, priced in the band of Rs. 41 to Rs. 43 per share, constitutes 79% of post-issue paid-up capital of the company. Existing promoters will subscribe to the extent of 22% of the issue, as per the RHP.

The issue can be termed as an FPO since the company is already listed on the Delhi stock exchange, and seeks to now list on BSE. It will not list on the NSE since it did not meet the market cap criteria of NSE. The issue will close on 16^th September for QIB bidders and on 17^th September for retail and HNI bidders.

The company manufactures printing ink and printing cylinders as well as trades in polyester films and other packaging materials. It has two manufacturing facilities at Kanpur (capacity of 1,000 MT ink manufacturing and 2,500 cylinders) and Jammu (840 MT ink manufacturing capacity), aggregating to 1,840 MT of printing ink and 2,500 printing cylinders. It also trades in polyester films of Uflex and Polyplex. The company's operations are very regional, with Uttar Pradesh alone accounting for 92% of total sales. The manufacturing to trading mix in its revenue is 25:75.

According to the company, the capacity utilization in ink manufacturing industry is always low. For FY10, its capacity utilization reduced to 53.7%, down from 58.7% in FY09. In the next 12-18 months, it plans to increase its capacity utilization levels to 65-70%.

Despite low capacity utilization, it is undertaking to set-up a 5,000 MT specialty ink manufacturing facility in Ghaziabad, Uttar Pradesh, with an investment of Rs. 24 crore, to be raised via the issue, thereby increasing its capacity by nearly four-folds. The cost per MT for the new capacity works out to Rs. 48,500, as against Rs. 18,370 per MT for the company's existing 1,840 MT capacity. However, this capacity expansion will not be EPS accretive immediately as the capacity utilization, here again, will be very gradual and need based.   

The other objects of issue also seem very structured:

a)       Working capital requirement of Rs. 14 crore, to meet the intensive working capital nature of the business

b)       Proposed acquisitions worth Rs. 5 crore, wherein no targets identified yet

c)       General corporate purposes Rs. 5 crore

The company's financials are dismal, to say the least. For FY10, it reported a topline of Rs. 72 crore, of which Rs. 54 crore or 75% was earned just from trading in polyester films. The net profit for the year was Rs. 2.2 crore, implying a net profit margin of just 3%. As on 31^st March 2010, it had outstanding debtors, closing stock and net current assets of Rs. 17 crore, Rs. 14 crore and Rs. 24 crore respectively, implying the intensive working capital nature of the company's business. As against this, the fixed assets were just Rs. 3.4 crore.

Present equity of Rs. 3.2 crore will expand significantly to Rs. 15.7 crore post issue, due to the heavy dilution to the extent of 79%. The existing promoters will subscribe to 22% of the issue, by investing Rs. 11.5 crore, while the balance funds of Rs. 40 crore will be raised from the public. One wonders why the promoters did not bring in the money, much before the IPO.

At present, the company is heavily leveraged. On a networth of Rs. 7 crore, as on 31^st March 2010, it had total debt of Rs. 20 crore (secured Rs. 16 crore and unsecured Rs. 4 crore).  

On the lower and upper band, PE multiple works out to 6.0 and 6.3 times respectively. On a book value per share of Rs. 21.6, as on 31^st March 2010, the issue is priced at a PBV of 1.9 and 2.0 times respectively. These multiples are unreasonable for a company with limited regional presence, generating majority of its income from trading activity and earning net margin of only 3%.

Fundamentally, the issue is very disappointing and investors are advised to remain away from it. Look for better opportunities both in the primary and secondary markets!