Gokul Refoils and Solvent IPO Analysis

Promoted by Balvantsinh Rajput, Kanubhai Thakkar, Mrs. Bhikiben Rajput and Mrs. Manjulaben Thakkar in 1982, Gokul Refoils and Solvent extracts solvents; refines edible oils, castor oils and their derivatives; and manufactures vanaspati.

Besides 680-tonne-per-day (tpd) seed-processing capacity, Gokul Refoil and Solvent has 600- tpd of solvent-extraction, 1,200-tpd of refining, and 200-tpd of vanaspati manufacturing facility. The company gets captive power from four windmills of 1.25 MW each in Kutch, Gujarat. It has also set up a co-generation power plant of 500 KWH at its Gandhidham unit in Gujarat.

To expand the scale of operations and have a global presence, Gokul Refoils and Solvent has set up two wholly owned subsidiaries in Mauritius and Singapore: Maurigo International Ltd and Maurigo Pte Ltd. The Mauritius subsidiary, Maurigo International, is involved in commodity trade on the Chicago Board of Trade and the Malaysia Derivatives Exchange (MDEX),Kula Lumpur, Malaysia. The Singapore subsidiary, Maurigo Pte, procures raw material and trades in commodity. Its strategic presence in Singapore enables it to locally negotiate and deal with the small and fragmented oil suppliers of Malaysia and Indonesia, which will enable the company to procure raw materials at reasonable terms.

Products are marketed under the brand name, Gokul, in Gujarat, Maharashtra, Rajasthan, Madhya Pradesh and Punjab.

Gokul Overseas is a partnership firm manufacturing and processing castor seeds and oil and their derivatives with plant at the Kandla Special Economic Zone (KASEZ). This partnership firm has reported sales of Rs 205 crore and net earning of Rs 8.59 crore in the financial year ending March 2007 (FY 2007).

Consolidated net sales stood at Rs 1323.20 crore and Rs 1563.46 crore in the eight months ended November 2007 and FY 2007. Operating profit margin (OPM) was 6.5% and 3.8%, and net profit Rs 41.83 crore and Rs 25.73 crore.

Standalone net sales stood at Rs 1309.28 crore and Rs 1562.49 crore in the eight months ended November 2007 and FY 2007. OPM was 6.3% and 3.9%, and net profit Rs 37.82 crore and Rs 26.94 crore.

A soya processing plant, with installed capacity of 1500 tpd and capital investment of Rs 51 crore, is proposed at Gandhidham, Gujarat. The existing edible oil refinery at Surat is being expanded to 400 tpd from 100 tpd, with an estimated outlay of Rs 12.31 crore. About Rs 15 crore is to be invested in brand building, Rs 10 crore to increase the warehousing capacity and meet other capital expenditure at existing units, and Rs 60.69 crore to fund part of long-term working capital. Rs 139.59 crore is to be raised at the cap price of the price band, and Rs 38.25 crore will be taken on loan from banks.

Strengths

Versatile manufacturing capabilities, giving extreme flexibility to manufacture all type of oils depending on the market requirement and availability of raw materials at competitive rates.

Weakness

Earnings are vulnerable to changes in the duty differential between crude and refined oil.

The business is characterised by inherently low margin.

Has negative cash flow fof Rs 5.39 crore from operating activity in FY 2007, Rs 21.18 crore in FY 2006 and Rs 18.91 crore in FY 2004.

Primarily present in the bulk market, where there are strong competitive pressures from the unorganised segment.

Valuation

Gokul Refoils and Solvent has set a price band of Rs 175 to Rs 195 per equity share of Rs 10 face value. At the lower band of Rs 175 per share, the P/E would be 7.4x times annualised EPS of Rs 23.8 for the November 2007 ended period and 17.9x times the EPS of Rs 9.8 for FY 2007 on post-issue equity of Rs 26.38 crore. At the upper band of Rs 195 per share, the P/E would be 8.2x times and 19.9x times respectively. In the edible oil industry, the comparable companies such as Ruchi Soya Industries, Gujarat Ambuja Exports, and K S oils have TTM P/E of around 12.6, 9.3 and 21.3, respectively.

via CM