Varun Industries is entering the capital market on 25th October, 07 with a public issue of 90 lakh equity shares of Rs.10 each at a premium of Rs.50 per share (total issue price Rs.60 per share) for Rs.54 crores.
The company is the largest exporter of stainless steel kitchenware and houseware items and has one of the biggest private sector warehousing facilities in India of 23,658 sq. ft. For FY 07, the total income of the company was at Rs.760.78 crores, PBT of Rs.28.84 crores and PAT of Rs.19.52 crores on equity of Rs.13.11 crores resulting in an EPS of Rs.14.90 . For 4 months ending 31-07-07 total income was Rs.307.15 crores, PBT of Rs.12.19 crores and PAT of Rs.8.06 crores, giving an EPS of Rs.6.15. This means, FY 08 may have an EPS of close to Rs.20.
The book value of the share on 31-07-07 is Rs.83.50, EPS of Rs.14.90 for FY 07, likely EPS of close to Rs.20 for FY 08, and promoters subscribing to 24.30 lakh equity shares at the same price of Rs.60 per share. This has been a rare instance amongst the recent issues, where promoters are bringing in 27% of fund requirements at the same rate, as is being offered to the public.
The worrying factor for the company is huge working capital requirement, high debt equity ratio and high raw-material cost to the extent of 90%. As at 31-07-07, the total borrowing of the company is Rs.375 crores which are largely backed by debtors of Rs.270 crores and inventory of Rs.75 crores. The company has debtor cycle of close to 90 days and hence every increase in topline has been putting pressure on working capital. Also, due to low conversion/trading margin, the company is in a catch 22 situation.
The present issue is to mobilize Rs.40.74 crores for working capital margin and Rs.10 crores for brand building and advertisement. This would ease working capital pressure as also shall improve margins. Infact, the company faces lot of competition from unorganized sector, which is a big threat. To counteract this, the company is also diversifying into iron ore and mining as also oil and gas drilling. Windmill power generation will also help, as the company plans to use power generated, for its stainless steel rolling mill at
Though the company operates in a thin margin, yet the issue is at a 30% discount to its present book-value as also with respect to promoters post issue stake of 60%. Considering these facts, issue is fairly valued and hence investment can be made, if you have a medium term investment horizon.