IPO Listings

LT Overseas - Listing On Dec 18 2006

Sobha Developers - Listing on Dec 20 2006

L.T.Overseas Ltd. Subscription Details

QIB - 8.39 times

NII/HNI - 4.29 times

Retail - 7.6 times

Overall - 7.18 times

Networth Stock - LT Overseas

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L T Overseas Ltd.

Background:

• LT Overseas Ltd. (LT Overseas) was incorporated as a private limited company in the year 1990. Subsequently in the year 1994, it converted to a public limited company.
• The company is primarily into the business milling, processing and marketing of branded & non-branded basmati rice. It also into manufacturing of rice food products. The company owns 19 brands including established brand like ‘Daawat and Heritage’. These brands are registered in 40 countries.
• Products of the company are sold both in domestic and overseas markets. In international market, the company has presence in UK, Canada, UK and other European Union. Top three foreign destinations are Saudi Arabia, USA and Spain. In domestic market the company has more than 100 distributors across the country.
• The company has a capacity to process 30.5 tonnes per hour (TPH) of paddy. It has its own processing facility in the state of Haryana. It has 74 mandis for procurement of basmati paddy.

Object of the issue:

• Expansion, Automation and Modernization at Sonepat, Haryana.
1. To set up a new Parboiled rice (sella) processing and milling capacity.
2. To set up a new milling line for producing value added rice.
3. To add balancing equipments and Automation of existing facility.
4. To set up Silos and Flat storage facility.
• Generating power for captive consumption.
• General Corporate Purposes.
• To meet the Public Issue Expenses.

Strength:

• Domestic sales have been in increasing trend since FY02. There is an increase in domestic sales of more than 64% in FY06 as against a total sales increase of 12.5%.
• Market share of branded basmati rice is 35% in comparison to 22%, 3 years back. EBITDA margins for unbranded exports are around 8% vis-à-vis around 16% for branded exports. Growth in domestic market for basmati is clearly visible as it is growing at 6% CAGR with branded basmati demand growing at 15% CAGR. Demand is set to rise with increase in number of consumers as well as the quantity consumed.
• LT Overseas is one of the top three players having a market share of 22% in domestic market. Large-scale operation of the company provides economics of scales and helps competitive pricing of its products.

Weakness:

• LT Overseas has not able to penetrate in overseas market. Export sales has been in decreasing trend since FY04. In FY06 Export sales were Rs.1,97million where as in FY04 the same was Rs.2,62 million.
• LT Overseas has contingent liabilities to the tune of Rs. 442.97 million. In the event of crystallization of any of the contingent liabilities, bottom line of the company will have an adverse effect.
• Although, net profit as a percentage of sales has been in increasing trend, still the margin is around 2.75%.

Valuations:

• RoNW has increased from 10.73% in FY05 to20.27% in FY06. Book Value per share during the same period has increased from Rs.67 to Rs.76.
• EBIDTA for the three-month ended June 30, 2006 was Rs.87.91 million. EBIDTA as a percentage of income during this period was 8%. In FY 2006, EBIDTA increased to Rs.319 million in FY06 from Rs.268 million in FY 05, showing an increase of 19%. As a percentage to total income it has increased from 7.43% to 7.91% during the said period.
• Post Issue EPS based on FY06 result works out to be Rs.5. At a price band of Rs.50 to Rs.56, P/E multiple is 10x to 11x. Average Industry P/E is 11.60.

IPO - LT Overseas: Avoid

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.