Raj Oil Mills - IPO Analysis

Raj Oil Mills, promoted by Shaukat S. Tharadra and his wife Shahida S. Tharadra, buys, sells, manufactures and processes edible oil. The company has a wide range of product offerings like mustard oil, sunflower oil, groundnut oil, cottonseed oil, til oil and ayurvedic oil. They are sold under three umbrella brands: Cocoraj, Guinea and Raj. These products have been in the market for more than five decades.

Raj Oil Mills markets the following products: Cocoraj (Coconut Oil), Cocoraj Cool (Ayurvedic oil), Guinea Groundnut Oil (double filtered oil), Guinea Lite Groundnut Oil (refined oil), Guinea Lite Sunflower Oil (refined oil), Guinea Lite Cottonseed Oil (refined oil), Guinea Lite Soyabean Oil (refined oil), Tilraj Til Oil, Mustraj Mustard Oil and Cocoraj Jasmine. It deals in edible oil in bulk and in customer retail packs ranging from 5ml pack to 15 liters.

At present, Raj Oil Mills has 5,00-tonne per annum (tpa) of crushing and 30,000 tpa of oil filtration at Manor, district Thane. Capacity utilization is 96%.

Raj Oil Mills wants to expand its crushing capacity to 60,000 tonnes at its present facility at Manor. At the same time, it wants to set up new capacities: 60,000 tonnes of refinery, 30,000 tonnes of palm fractionation, 15,000 tonnes of vanaspati ghee, and 1,500 tonnes of ayurvedic and cosmetic production. The company also wants to set up a 60,000-tonne crushing capacity at Bagru, district Rajasthan.

To finance these projects, Raj Oil Mills is going for an initial public offering (IPO) of 95 lakh equity shares of face value of Rs 10 each through a 100% book-building process at a price band between Rs 100 and Rs 120 per equity share.

Strengths

Financial track record is good, with consistent growth in sales, margins and profits. However, operating profit margin, at 16.4% for calendar year (CY) 2008, looks high as compared to other solvent extraction companies whose margins are in the range of 3% to 7% The high margin is attributed to its focus on retail sales.

Weaknesses

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

It's a regional player mainly focused on western India.

Has a negative net operating cash flow of Rs 12.5 crore in CY 2008 and Rs 7.5 crore CY 2007. Has not complied with terms of a bank loan. Outstanding amount to be repaid was Rs 1.5 crore end March 2009.

Valuation

Raj Oil Mills has set a price band of Rs 100 to Rs 120 per equity share of Rs 10 face value. At the lower band of Rs 100 per share, the P/E would be 12.2x times and at the upper price band of Rs 120 per share, the P/E works out to be 14.6x times the EPS for CY 2008. Industry composite TTM P/E is 12.4.

via CM