Kovilpatti Lakshmi Roller Flour Mills Ltd.

Background:

• Kovilpatti Lakshmi Roller Flour Mills Ltd. (KLRFM) was incorporated as Kovilpatti Lakshmi Roller Flour Mills Private Ltd. It became a Public Ltd company in the year 1982. Company has 1 flourmill, 2 textile units & 1 metal fabrication facility in Tamil Nadu.
• KLRFM started its wheat flourmill operation in 1964. Its total milling capacity is 5000 tons a month. It markets its wheat products in the South and Central regions of Tamil Nadu and Kerala.
• In 1978 company established an Engineering Division to manufacture sheet metal products. In 2001 KLRFM leased out this facility for Rs. 1,75,000/- per month. However, this agreement has expired on 30 September 2006. Now KLRFM has overtaken the operations. They are further expanding this division by acquiring Eltex Super Castings Ltd.
• The company undertook further diversification in 1982 with entering into cotton textile spinning. It has 2 spinning mills. Unit I has a capacity of 29,520 spindles & Unit II has a capacity of 1,344 rotors. It supplies yarns primarily to clothing units in Maharashtra and Tamil Nadu and exports to East Asian countries such as Korea, Malaysia and Singapore.
• The flour milling division milled 42,190 tons of wheat in FY06 accounting for 51.18% of the turnover. Textile division produced 48,16,383 kgs of cotton yarn valued at Rs. 43.13 crores which contributed to 48.82% of the company’s revenue.
• The flour-milling unit has obtained ISO 9001 certification; textile unit 1 has obtained ISO 9002 certification.
• KLRFM has nearly completed restructuring & started the operations of Eltex Super Castings Ltd., which has a production capacity of 9000 TPA. It has acquired 65.44% of the equity share capital of Eltex in August 2006. This acquisition is being funded with help of Rs.14.3 crore of FPO, Rs. 9.74 crore debt & Rs.6.56 crore of internal accruals.
• Pre FPO promoter’s holding is at 60.39%, post issue the holding will come down to 28.99%.

Objects of Issue:

• Investment in Eltex of Rs.1,7 crore
• Forestablishment of 2 wind mills of 1.25 MW each for Rs.1,2.30 crore
• To meet issue expenses for Rs.1.3 crore

Strengths:

• KLRFM markets all its products under the brand name "Kuthuvilakku" which has garnered good acceptance from the user industries.
• KLRFM owns 9 wind mills with a total installed capacity of 6.25 MW of power generation for captive consumption. This has resulted in lower power cost (saving of Re.1 per unit) for the company and tax benefits.
• Company has restarted its engineering division & most of its old clients like TVS Group companies, Amalgamation Group, Elgi Group, LMW & Audco India have shown interest in procuring supplies from it.
• The company’s OPM increased by 2.5% to 10.5% in FY06 from 8% in FY05. Its NPM increased from 1.9% in FY05 to 3.3% in FY06. Also company enjoys low debtors/ sales ratio of 8%. It has been consistent between 7%-9% since FY03.

Weakness:

• The bulk of the issue proceeds is for investment in Eltex Super Castings Ltd. ["Eltex"], which is a Sick Industrial Unit.
• Company has generated negative cash flow of Rs.4.5 crore in FY06.
• Both industries in which company has been operating have grown at a CAGR of 5% and above but KLRFM sales grew by 4% CAGR for last 6 years.
• Sales for FY06 declined by 2.6% (YoY) to Rs.92.4 crore from Rs.94.9 crore in FY05. Also, company has an inconsistent sales track record for a period of FY00 to FY06.

Valuation:

• Company’s shares are listed on BSE stock exchange and are currently trading at Rs.69 as on 22nd November 2006.
• KLRFM’s FY07 half yearly sales grew by 20% & PAT by 11% (YoY).
• The company’s net worth as on 30th June 2006 is Rs.18.1 crore and book value per share at Rs.75.3 per share (pre equity issue).
• Post issue annualized EPS based on 30th September 2006 earnings is Rs.6.85 per share. The shares are being offered in the price of Rs.55 at PEx of 8 & PBx of 1.25 (expected).