RDB Rasayans IPO: Slim chance of profits

Business Profile

RRL manufactures industrial packaging products like FIBCs used in bulk packaging, poly propylene (PP) woven sacks and fabrics, etc at its manufacturing facility in Haldia. It has an installed capacity of 7,000 MTPA and mainly caters to domestic industries like chemicals, fertilisers, cement, carbon black, agro products, etc. RRL also exports to various European and the Middle Eastern countries which contribute around 12 per cent of the gross revenues. The company is raising funds primarily to expand its installed capacity by 7,450 MTPA by establishing Unit-II adjacent to its existing manufacturing facility at an estimated cost of Rs 32.65 crore.
 
RRL is part of the RDB Group which with its 35 group companies and ventures is engaged in various other businesses. What investors must note is that over the past three years 28 group companies have been consistently reporting losses. One of the group’s listed companies - RDB Realty - is listed on the bourses but is part of the ‘T’ group. There are also a number of outstanding litigations against the promoters and the group companies amounting to Rs 180 crore which could have far-fetched negative implications on the company. All the above mentioned issues surrounding the promoters and group companies obviously do not generate enough confidence about the management of the company.

RRL currently operates at 60 per cent of the installed capacity and expects to operate at 75 per cent post the expansion. However the company has not provided any information on how it would achieve such levels. In fact we have observed that RRL operates in an area of business which is highly fragmented with high risk in terms of raw material availability and price fluctuations as most of it are derivatives of crude oil. Moreover, the company is highly dependent on a small base of customers as its top ten customers accounts for 85 per cent of the revenue. 

On the financial front the company has showcased very inconsistent growth pattern. Even though the company’s topline and bottomline grew by 50 per cent and 130 per cent respectively in FY11 the company had witnessed a 15 per cent and 60 per cent fall in the the same for FY10. The chief reason was a drop in export volumes and high input prices which impacted its overall performance. Now with similar concerns of a slowdown in developed economies and high input prices one can expect the company to face turbulence in its future endeavors.   
 
On the valuation front, based on its post issue EPS of Rs 1.03, the company is commanding a PE of 70.03-76.84x its lower band and upper band respectively. We believe that the company is asking for very high valuations given that it is a small player in the packaging business and its peer companies too are not commanding huge premium on the bourses. In fact, there is not much fancy for a sector like this on the bourses. We advise investors to avoid the IPO as we expect the scrip to be available at 50 per cent of its offer price. Also, this company would be listed only on the BSE and hence there could be a liquidity issue too.

Shareholding Pattern

Financial Performance

Issue Information