Blue Bird India Allotment

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Blue Bird India: Avoid

Investors can avoid the initial public offer of Blue Bird India (BBIL). At the upper end of the price band, the offer values the company at about 12 times its annualised FY-07 per-share earnings, on a fully expanded equity base. This is in line with valuations commanded by Navneet Publications. The latter, while smaller than BBIL in terms of revenues, enjoys better margins due to its publication business and offers a superior exposure to this market segment.

BBIL manufactures notebooks and has a presence in western India. Close to 90 per cent of its Rs 400-crore revenue is derived from the sale of notebooks. The company also undertakes commercial printing and recently entered the publication business.

Performance and prospects

BBIL's performance in recent years has been encouraging. Revenues recorded an annualised growth rate of 65 per cent between FY-02 and FY-06. Profits have grown at a scorching pace, jumping fifty-fold during this period; this has been on a low base though. Technology improvements helped operating margins expand from about four per cent to about 13 per cent over this period. Growth in recent quarters appears to have been more sedate, with margins settling at about 13 per cent.

Growing literacy rates offers a steady market for BBIL, which has prompted it to expand its presence beyond Maharashtra. According to an AC Nielsen-ORG Marg study, the notebook market is likely to grow at a compound annual growth of 13 per cent through 2011. This is likely to ensure that BBIL sustains a double-digit revenue growth. A more aggressive push to increase the share of commercial printing and publication in overall revenues could prevent margins from stagnating at these levels. Concerns, however, stem from the long gestation period of the proposed project and the resource crunch that the company could face if the offer is subscribed only at the lower end of the price band.

Expansion plans

BBIL is to invest Rs 70 crore towards expanding its unit in Pune and setting up a new facility in South India. The project will expand its notebooks capacity by 50 per cent and double its printing capacity.

It also intends repaying long-term debt worth Rs 20 crore and augment working capital requirements of Rs 30 crore. With the help of its pre-IPO placement and the current offer, Blue Bird should be able to cover about Rs 100 crore of its requirements. The rest is likely to be met through internal accruals.

However, BBIL's cash flow situation has only now begun to show signs of improvement. The business is working capital intensive and operating cash flows turned positive only in FY-06. Using its internal accruals to meet the balance Rs 30 crore is likely to impose a strain on its resources.

Moreover, the new capacities will go on stream only in the fourth quarter of FY-08. In the medium term, therefore, there could be pressure on earnings growth.

Offer details: Eighty-seven lakh shares are on offer. The price band is Rs 90-105. At the upper end of the price band, Blue Bird will raise Rs 90 crore from the public. The promoter holding post-offer will be 52.6 per cent. The offer closes on November 22. The lead manager is DSP Merrill Lynch.

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ICICI - Blue Bird (India) Ltd

Background

Blue Bird (India) Ltd was incorporated in 1999 as Anil Apporv Printers & Manufacturers Private Ltd and the name of the company was changed Blue Bird in 2005. The company is engaged in making student/ exercise books and stationery, commercial printing and publications. Mr Nitin P Sontakke and Ms Vidya N. Sontakke are the promoter-directors of the company. Mr Sontakke is a diploma holder in Printing Technology and is in this business since 1975. Ms Sontakke is a graduate in science. Promoters’ and other key employees holding will be 52.6% and18.9% of the post issue paid-up equity capital respectively.
The issue

Issue Size: 8,775,000 fresh issue of equity shares of Rs 10 each fully paid-up of which
Employee Reservation: Nil
Net Issue to the Public:8,775,000 equity shares of Rs 10 each fully paid-up
Objectives of the issue

The objective of the issue is to raise capital to set up new manufacturing facilities and expand existing facilities; replenish the internal accruals of the company used for purchase of factory land located at Pune; purchase of existing registered/ corporate office premises presently on leave and licence; capital expenditure for setting up of new regional sales offices, repayment of existing long term debts, augmentation of long term working capital and for general corporate purposes.

Key Investment Rationale

High growth opportunities
Blue Bird derived 87.9% of its revenue from student/ exercise books and stationery for FY06. Growth in demand for these products derives from growth in economy, increase in rates of education and increase in government outlay for the education sector. GDP has been showing a consistent growth rate of 6-7% in last five years and per capita spending on education has also increased from 1.2% of GDP in 1983 to 4.4% of GDP in 2003.

Size of the market for student/ exercise books and stationery is estimated at approximately Rs 8000 crore and is growing at approximately 20% as per AC Nielson ORG MARG survey report commissioned by the company. Organized players have 20% market share and unorganized players have 80% market share. Apart from growth due to increase in demand BBIL has growth opportunities from increase in market share of the organized sector. Being in organized sector the company has advantages of superior quality products, automated production processes, economies of scale and greater marketing resources.

Market leader in paper-based notebook industry
Blue Bird is the market leader with a 48% share in organized segment of the paper-based notebook industry. The total size of this segment is estimated at Rs 743 crore. Due to higher market share BBIL would be the maximum beneficiary of growth in the organized sector.

Nationwide sales and distribution network
Blue Bird has 18 regional sales and marketing offices. Out of this 9 are in Maharashtra, and the remaining 9 are in other different parts of the country. The company is strengthening its network further and has plans to open additional 10 such offices in FY07, 20 in FY08 and 10 in FY09. BBIL expects to have a total of 118 regional offices by FY11.

New plant in south India
The company is setting up a new plant in south India, which will further enhance its market share in that region and also save on transportation costs.

Key concerns

Export obligation
The company has imported some of its equipment under Export Promotion Capital Goods (EPCG) scheme and has export obligation of Rs 52.6 crore by March 18, 2014. In case the company is not able to fulfil these obligations, it will have to make payment of Rs 14.4 crore towards custom duty saved. The company also intends to import machinery under EPCG scheme for the additional manufacturing facility. This will create further export obligations and contingent liabilities for the company.

Financials

Operating income has grown by 21.2% to Rs 400.9 crore for FY06 from Rs 330.8 crore in FY05. EBITDA has grown by 51.7% to Rs 53.0 crore from Rs 34.9 crore. PBT has grown by 42.6 % to Rs 39.3 crore from Rs 27.5 crore. PAT has grown by 42.2% to Rs 25.1 crore from Rs 17.7 crore. The company made an EPS of Rs 10.0 for FY06. For FY06 the company had a RoNW of 49.8% and RoCE of 17.0%.

Valuations

The issue price of Rs 90-105 discounts its FY06 earnings of Rs 7.2 per share on the diluted post-issue share capital by 12.6x - 14.6x. Navneet Publications, which is in the same line of business, is currently trading at Rs 57.5 at a P/E of 13.3x. Valuations of shares at the issue price band are reasonable and growth prospects also look good. We recommend subscription to the issue.

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Blue Bird (India) Ltd. IPO - Indiainfoline

Issue price – Rs90-105
AVOID

Blue Bird (India) Ltd. (BBIL) is a leading manufacturer of paper-based notebook and stationery products with the highest market share of 48% amongst large, organized players in India.

BBIL also manufactures other stationary products like files, perforated pads, registers, filler papers and provides commercial printing services. From FY05, BBIL has commenced exports to Ghana, Kenya and South Africa and plans to initiate exports to the developed countries including in Europe and North America.

BBIL registered a strong 21% yoy growth in net sales at Rs4bn and 57% yoy rise in net profit at Rs251mn during FY06. During H1 FY07, the company recorded revenues of Rs2.4bn and a net profit of Rs151mn.

Almost 97% of the company’s total revenues are generated from the
western India (including Maharashtra). The company is also present in southern India and is in the process of further expanding its presence to Andhra Pradesh, Karnataka, Kerala and Tamil Nadu.

BBIL plans to set up new manufacturing facilities for making
student/exercise books in southern India and increase the capacity of its Pune plant. It also plans to repay its long-term debt of Rs192mn.

In the printing and stationery industry, Navneet Publications and
Sundaram Multi Pap Ltd are the closest competitors of BBIL. However, we cannot strictly compare BBIL with Navneet, which is more of a content and publication company than just a notebook and stationery products manufacturer. We recommend investors to wait for some correction post listing and then take position in the company.

Blue Bird (India) IPO Analysis

Blue Bird (India) is a leading manufacturer of paper based notebooks and stationery. The company is raising capital to finance its two major expansions: one in south and the other in west India. It is setting up a second notebook manufacturing and printing unit in south India to address the logistic needs in procuring raw material and delivery of products to retailers in the region at an estimated cost of Rs 45.41 crore. The project is likely to commence in the fourth quarter of fiscal 2008.

To reduce a major portion of outsourcing costs, Blue Bird (India) is expanding capacity at its existing plant at Pune. The project, estimated to cost Rs 26.07 crore, is likely to commence in the third quarter of 2008.

Blue Bird (India)’s Pune plant has a capacity of 51,000 tonnes for notebooks and stationery and 12,500 tonnes for printing and publication with capacity utilisation of 74.3% and 50.9% in FY 2006. Post-expansion, the capacity will increase to 76,000 tonnes and 25,000 tonnes, respectively.

Strengths

The Blue Bird brand is established in west and south India. AC Nielsen ORG-MARG has estimated that Blue Bird enjoys the highest market share of 48% of the total market share controlled by large, organized players in notebooks.

The financial track record is good with continuous growth in sales and profit. The last three-year CAGR up to FY 2006 is 65% in sales and 100% in net profit.

Weaknesses

Strong competition from unorganised local players, which controls 80% of the market.

Growth in sales and profit has been slowing down over the years. In the first-half ended September 2006, sales were up only 18% and net profit 20%. Benefits of the projects will accrue only in the later part of FY 2008.

Valuation

In October 2006, Blue Bird (India) privately placed 1,225,000 equity shares at a price of Rs. 98 per share.

The first-half annualised earning per share based on the post-issue equity capital is Rs 8.6 (FY 2006 EPS: Rs 7.2). At the lower price band of Rs 90, PE stands at 10.4 times, and at the higher band of Rs 105 PE is 12.2. The nearest comparable company Navneet Publications enjoys TTM PE of 13.5.

Blue Bird (India) Ltd. IPO

Analysis

Background

• The company was incorporated in the year 1999 as Anil Apporv Printers & Manufacturers Pvt Ltd and it changed its name subsequently to Blue Bird (India) Ltd (BBL) in the year 2005.
• BBL is engaged in the business of manufacturing of paper-based notebook products, commercial printing and publication. Company’s product portfolio includes student/exercise books, stationery products like files, perforated pads, registers, filler papers and other bespoke commercial printing of items such as calendars, diaries, leaflets, product pamphlets, instruction materials and publish books etc.
• BBL has its manufacturing facilities at Pune. Company has converted 38,468 metric tons of processed paper into notebooks during fiscal 2006 and the average production of notebooks per day is approximately 131 metric tons of notebooks. Capacity utilization for the FY 2006 stood at 74.3% for the manufacturing and binding of standard notebooks.
• BBL clientele includes approximately 600 wholesalers/dealers and approximately 9,000 retailers. Commercial printing segment is catering to the needs of various business concerns including entertainment companies, financial institutions, publishers and educational authorities.
• BBL’s income consists primarily of revenues (88%) from the sale of notebooks. Company also generates income(4%) through commercial printing and publication (6%). Since fiscal 2005 it has begun to generate income (2%) through the export of notebooks and printed matter to Ghana, Kenya and South Africa.
• Unorganized regional manufacturers control approximately 80% of Rs. 80,000 million of the Indian stationery market. Only 20% of the market is organized out of which the large players control 15% and the medium sized players control the balance 5%. Of which Rs. 51,000 million is attributable to the sale of notebooks and exercise books.

Objects of the issue are:

• Setting up of new manufacturing facilities for manufacturing of notebooks in southern India.
• Expansion of our existing facility at Pune to increase the capacity of manufacturing of notebooks and printing/publication.
• Replenishing the internal accruals of the Company used for purchase of factory land located at Pune.
• Purchase of existing Registered/Corporate office premises presently on leave and license.
• Capital expenditure for setting up of new regional sales offices.
• Repayment of existing long term debts.
• Augmentation of long-term working capital.
• General corporate purposes.

Strengths:

• Company has the highest market share of 7.2% and is the largest organized player for paper based notebook products as of May 31 2006 (As per AC Nielsen ORG MARG). The second largest player has a market share of 2.55% and the remaining 8 other players have a combined market share of 5.25%.
• Sale of notebooks, which constitutes major portion of income and has increased at a CAGR of 69.5% from Rs. 428.1 million in FY 02 to Rs. 3530 million in FY 06.
• The large-scale versatile manufacturing infrastructure provide BBL an edge over unorganized printers (which control around 80% of the market) in the student/exercise book and allow company to compete more effectively with organized manufacturers by developing efficient and cost-effective processes for different products at short notice.
• Company is planning to focus on products such as diaries and other stationery products designed for personal use. These products involve higher margins. Moreover it also planning to emphasize on commercial printing and publication businesses, which also generate higher margins by taking advantage of existing customer relationships and brand recognition.

Weakness

• Company is allowing approximately 90 days of credit facility to its customer.However it does not enjoy similar favourable terms with its suppliers led to mismatch in realization and payment time and has caused company to experience negative operating cash flow in previous years.
• BBL depends on the sale of notebooks for a predominant proportion of its revenues. During fiscal 2006 and 2005, 87.9% and 89.3% of company’s revenues were derived from sales of notebooks reflecting towards less diversified product mix.
• The prices of printing and writing paper continue on an upward direction. With the absence of long-term contract and stiff competition from local players it may face lower margins going forward.
• The Company has high cost long term borrowings aggregating to Rs. 192.36 million as on March 31 2006. Leading to high interest expenses. Interest coverage ratio of the company decreased during FY 06 to 4.79% from 5.38% in FY 05
• Company has regional concentration as 96.9% and 97.9% of BBL’s revenues during fiscal 2006 and 2005 were derived from sales to customers in the state of Maharastra and western India.

Peer Analysis for the half year ended 30th September 2006

COMPANY	Blue Bird (India) Ltd.	Navneet Publications
Sales	2371 million	2342 million
PAT	151 million	38.8 million
RONW	40.02 %	N.A
EPS	12.08	4.07
NPM	6.4 %	16.56 %
OPM	13.09 %	26.18 %

Valuation

• The net profit of the company has been increasing at a CAGR of 166.6% from Rs. 4.99 million in FY 2002 to Rs. 251.16 million in FY 2006. Total income of the company increased at a CAGR of 66.5% from Rs. 522.5 million to Rs. 4016 million for the same period.
• Company’s net worth as on 30th September 2006 stood at Rs. 752.23 million.While the book value as on 31st March 2006 was at Rs.24.5.
• Post issue Annualized EPS based on 30th September 2006 earnings comes out to be Rs. 8.62. Shares are being offered in the price band of Rs. 90 to Rs. 105. At P/E multiple of 10.4 to 12.2 while industry is trading at a P/E of 13.5.