Olympic Cards IPO: An uninviting offer

The Indian equity markets are maturing, which can be seen from the way businesses that are good at the individual level are getting listed on the bourses. Continuing the same streak, Olympic Cards (OCL), a Chennai-based wedding card manufacturer plans to tap the markets with its IPO on 9th March, 2012 to garner Rs 25 crore for setting up additional manufacturing capacity (Rs 19.82 crore) and opening four new retail outlets (Rs 3.16 crore) in Chennai. It will be the first company of its kind to get listed on the stock exchange. The business looks good at the individual level, but the scalability of the same is questionable.

OCL claims to be one of the leading manufacturers and sellers of paper-based products ranging from wedding cards, greeting cards and business cards to other stationary products like envelopes, letter heads, calendars, notebooks, account books, etc. The company also trades in various other paper products. However, its business reach is highly restricted to Tamil Nadu, with three manufacturing facilities, four godowns and five retail stores in Chennai and one retail store in Coimbatore.

Judging by the fragmented nature of the wedding cards industry, we believe that the company’s operations being limitated within the state of Tamil Nadu will seriously hamper its growth prospects. If it ever wishes to expand its reach into other states it may face very high competition. Besides, any advertising expenses it incurs may hamper its margins going ahead. Its proposed new capacity would be located in the Kannigaiper village in Tamil Nadu, with another four retail outlets based in Chennai.

OCL lacks any competitive edge, as its business model can be easily duplicated. The company does not even own its current logo, and has been in an agreement with another promoter entity over the use of the logo. According to the terms of the agreement, OCL is bound with a compulsion to share two per cent of its revenues with the other promoter entity from 2015 onwards. Looking at its net margins, which stand at about six per cent, the revenue sharing may prove to be a loss for its shareholders.

As OCL derives a major chunk of its revenues from the wedding card business, its business model is largely based on lavish marriage expenses, which remain restricted to the high income group in society. The opportunities in this industry largely remain localised, and customers also remain loyal to the card manufacturers.[PAGE BREAK]

On the financial front, the company reported a 31 per cent growth in its topline to Rs 45.72 crore in FY11. Its bottomline also showed a 68 per cent growth to Rs 2.18 crore. For the nine months of this fiscal, due to the high growth in traded goods, its total income is Rs 32.72 crore while the net profit is Rs 1.93 crore.

On the valuations front, a PE of 24x looks very steep for such a small company. Based on all our arguments, we advise our readers to avoid this IPO.