Raj Oil Mills to list today

Shares of Mumbai-based Raj Oil Mills will debut on the bourses today, 12 August 2009. The company had priced its initial public offer at the top end of the Rs 100-Rs 120 price band. The IPO had closed for on 23 July 2009, with a total subscription of 1.24 times.

IPO Grey Market Premium - NHPC, Adani Power

NHPC 30 to 36

8 to 10

Adani Power 100

11 to 12

Raj Oil Mills 120

7 to 10

Raj Oil Mills to list on 12 August 2009

The IPO was priced at Rs 120 per share

Shares of Mumbai-based Raj Oil Mills will debut on the secondary stock markets on Wednesday, 12 August 2009. The shares will be listed on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).

The company had priced its initial public offer at the top end of the Rs 100-Rs 120 price band. The issue price of Rs 120 discounts the company's year ended December 2008 earnings per share (EPS) of Rs 8.2, with a price earning (PE) multiple of 14.63.

The IPO had closed for on 23 July 2009, with a total subscription of 1.24 times. The company received bids for 1.17 crore shares compared with 95 lakh shares on offer. The issue constituted 26.38% of the fully diluted post-issue paid-up capital of the company.

Raj Oil Mills is a branded player in the edible oil business. It is engaged in processing and marketing of vegetable oils. The company plans to use issue proceeds to set up various facilities at Manor, Thane district, Maharashtra. These include a refinery of 200 tonnes per day (tpd), which can process Sunflower, Soyabean, Groundnut, Palm, Cotton Seed oils; a crushing unit of 200 tpd for Groundnut and Copra; a Palm Fractionation unit of 100 tpd; and a Vanaspati Ghee unit of 50 tpd, an Ayurvedic and Cosmetic unit of 5 tpd and an in-house blow moulding plant for PET Bottles.

The funds of the IPO will also fund setting up of crushing unit of 200 tpd for sesame and mustard at Bagru, Jaipur district, Rajasthan; for brand promotion, expansion of marketing & distribution network and for setting up of research and development facilities. The margin money for working capital requirement and issue expenses will also be met out of issue proceeds.

The company reported a net profit of Rs 29.62 crore on sales of Rs 317.76 crore in the year ended December 2008.

Raj Oil Mills IPO Review

Raj Oil Mills IPO Review

Raj Oil Mills

Investors can refrain from subscribing to the initial public offer from Raj Oil Mills. Strong demand prospects for edible oils, the company’s established brands in Western India and a record of good profit and revenue growth, are positives to the offer. However, the aggressive nature of the capacity expansion plans peg up execution risks and the asking price for the offer is stiff, if expansion plans make a delayed contribution.

At the two ends of the price band of Rs 100-120, the asking price discounts the company’s fully diluted earnings for the last financial year (ended December 2008) by 12-14.5 times. Assuming the company successfully implements its expansion plans, the multiple would work out to 8-10 times (FY-11) earnings.

That appears high given that competition is intense and margins in this business are susceptible to significant swings, based on input price fluctuations.

Players of a much larger size such as KS Oils (11 times) and Ruchi Soya (8 times) trade at lower trailing multiples. That suggests that the stock may offer opportunities for investment at lower prices, post-listing.
Expansion in sales

Raj Oil Mills has a strong presence in the Western region with brands such as Cocoraj (coconut and ayurvedic oil) and Guinea refined oil (edible oils spanning groundnut, sunflower, mustard, cottonseed and soyabean). The promoter’s long experience in the industry, a diverse product portfolio and the company’s focus on the retail segment through a range of pack sizes have helped it manage consistent growth in recent years.

Over the three years to 2008 (the company adopts a calendar year), the company has managed to ramp up its sales from Rs 85 crore to Rs 317 crore. The expansion in sales has been accompanied by a scaling up of refining capacity from 15,000 to 30,000 tpa over the past two years, funded mainly through debt (debt:equity at 0.2:1).

The company has defied broader industry trends to manage nearly full utilisation of its existing capacity in recent years. Substantial expansion in operating profit margins from under 5 per cent to over 16 per cent helped net profits climb from below Rs 2 crore in 2005 to Rs 29.6 crore for 2008, the latest full year for which financials are available.

Operating profit margins stood way ahead of the industry averages of 8-11 per cent, which the company attributes to a strategic procurement of raw materials and a higher proportion of retail sales.

However, going forward, the company’s operating profit margins may moderate to industry levels, as raw material prices stabilise and the company undertakes capex to adopt a more integrated model of manufacturing. Establishing a Pan-India distribution network and a national brand presence is likely to prove quite expensive and may involve large promotional outlays that could reduce margins as well.
Execution risks

Despite a wide supply deficit for edible oils in the Indian market, the retail segment is very competitive with many national players (Adani Wilmar, ConAgra, Marico) as well as successful regional brands which offer strong price competition. Unlike other FMCGs, edible oils (even the branded segment) is quite price-sensitive, making it difficult for players to pass on input cost increases to consumers without the threat of substitution. The current inflationary scenario for edible oils may make this year quite challenging in this respect.

The proceeds of this Rs 114 crore IPO (at the higher end of price band) are proposed to be used to significantly scale up oilseed crushing capacity (5,000 tonnes per annum to 30,000 tpa) at the existing location at Manor, Thane, and set up new refining capacities (60,000 tpa), palm oil processing (60,000 tpa), vanaspathi (15,000 tpa) and facilities for ayurvedic and cosmetic products.

The added crushing capacity is expected to reduce reliance on third parties for sourcing of crude oil, which could ensure more reliable supply. The bulk of the above capacities are expected to be commissioned this November.

The manifold expansion planned, the lack of external monitoring and the fact that it is to be funded entirely by equity, peg up the execution risks associated with the project. Overall, the company’s fundamentals are reasonable enough to bear watching post-listing; but stiff pricing makes the offer a relatively risky investment.

Grey Market - Raj Oil Mills, NHPC, Adani Power, Excel Infoways

Excel Infoways Ltd. 80 to 85

4 to 6

Raj Oil Mills Ltd. 100 to 120

6 to 8

Adani Power 110 to 130 (Approximate)

11 to 13

NHPC 15 to 20 (Approximate)

3 to 4

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