Investment can be avoided in the initial public offering (IPO) of LT Overseas. Engaged in the business of milling, processing and marketing of branded and non-branded rice, LT Overseas is one of the top three volume players in the domestic basmati rice market. In the price band of Rs 50-56, the offer is priced at 10-12 times its expected March 2007 per share earnings on post-offer equity.
Though the industry's growth prospects appear bright, we feel that at the given price band the valuations appear stretched vis-à-vis its peers.
Investors with a long-term perspective are likely to find better options in the secondary market from players such as KRBL or Satnam Overseas, which enjoy better operating marginsand are available at attractive valuations.
Satnam Overseas, for instance, enjoys a strong presence in both the domestic and overseas market with its `Kohinoor' brand of basmati rice. Its foray into the ready-to-eat food segment has successfully de-risked its position in the branded basmati rice division.
The stock trades at about seven times its likely FY-07 earnings per share. KRBL, on the other hand, is the largest exporter of basmati rice, globally, and its `India Gate' brand enjoys the highest brand share in India. The stock trades at 9 times its likely FY-07 earnings per share.
Business
LT Overseas has a presence in both domestic and international markets, with a share of 22 per cent in the former. The company has a pan-India presence with 100 distributors present in almost every State and in more than 35 countries. The company owns 19 brands; `Daawat' and `Heritage' are among the well-known ones, with the former enjoying a market share of 17.5 per cent in the domestic market (third in terms of market share).
A major part of the funds thus raised would be used for expansion, automation and modernisation of its Sonepet plant, with a new parboiled rice processing unit and storage facilities. It also plans to use the funds for setting up facility for captive power consumption.
Financials
LT Overseas has seen a healthy growth in revenues over the last three years due to increase in volume and realisation of basmati rice in the domestic market. Though the volumes in the export sales have remained more or less flat, improved realisation has led to an increase in the bottomline contribution from the export segment as well.
The operating margins have also improved marginally on account of decrease in manufacturing and sales and distribution expenses. However, the growth has been in line with the industry trend.
New Initiatives
LT Overseas plans to make a foray into the ready-to-cook rice segment. It would, however, face stiff competition from Kohinoor's ready-to-eat food products.
The company has also undertaken various R&D initiatives such as shrinking the seasoning time for basmati rice that will benefit it through reduced working-capital requirements. It has formed a strategic alliance with Phoenix Agri Silica Corporation for developing a silica plant to convert husk ash (a waste generated during milling process) into silica, a raw material used in cement industry. Besides, LT Overseas has also entered into a contract farming agreement with Tata Chemicals.
However, we do not believe that the company has a distinct competitive advantage that would enable it to outpace its peers. We feel that the market would certainly throw better opportunities for investors to enter the stock later when it is rightly valued.
Offer details
The initial public offer is open from November 27-30. The company seeks to raise Rs 35-39 crore through this offer. UTI Securities and IL&FS Investmart are the book-running lead managers. Bigshare Services is the registrar to the issue.