RDB Rasayans - Unrewarding Issue

RDB Rasayans (RRL) recently came up with an IPO, wherein shares were issued in a price band between Rs 72-79, which settled at the upper price band of Rs 79.

RRL manufactures industrial packaging products like Flexible Intermediate Bulk Containers  (FIBCs) used in bulk packaging, Poly Propylene (PP) woven sacks and fabrics etc. at its manufacturing facility in Haldia, with an installed capacity of 7000 MTPA, mainly catering to domestic industries like chemicals, fertilisers, cement, carbon black,cagro products, etc.

The scrip listed on the BSE on 7th Oct, 2011, at a price of Rs 85, but was hammered down on the first day amidst high volumes. At present, it is quoting at Rs 15.15, as of 19th Oct,2011, down by 82 per cent from the offer price.

Does this huge discount make RDB Rasayans an interesting buy now? Our answer is a resounding “No”. At the time of our IPO analysis, we had clearly forward. Even at its CMP, the counter is not worth investing in, because it will not provide any price appreciation.

The main reason we see for this is that the parent company – RDB Group – has ventured into various other businesses, wherein they have reported losses. Moreover, there are also a number of pending litigations against the promoter and the promoter groups, which paint a very unsatisfactory picture about the management and its business ethic.

Further, RRL operates in an area of business, which is highly fragmented, with high risks associated towards raw material availability and price fluctuations, as most of it comprises derivatives of crude oil. Also, the company is highly dependent on a very small base of customers, as the top ten customers account for almost 85 per cent of its revenues.
Another important observation is that the issue has failed to attract the interest of FIIs/DIIs, and the HNI portion was also meagrely subscribed.

On the financial front, the company has showcased a highly inconsistent growth pattern. Even though RRL’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 for the same in FY10. This was primarily on account of 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 a high input price scenario, one can expect the company to face turbulence in its future endeavours.

On the valuation front, at its CMP, the company is commanding a PE of  19x its post-issue EPS of Rs 1.03. We believe that the company is trading at high valuations, given that it is a small player in the packaging business, and its peer companies too are not commanding a huge premium on the bourses. In fact, there is not much fancy for a sector like this on the bourses. We advise our readers to stay away from the counter.