Olympic Cards – Exit

A Chennai-based wedding cards manufacturer, Olympic Cards (OCL), recently tapped the primary market to raise Rs 25 crore. The money tapped was to be used to set up an additional manufacturing capacity (Rs 19.82 crore) and to open 4 new retail outlets (Rs 3.16 crore) in Chennai.

In our analysis, we had recommended that investors avoid this IPO, since we don’t see scalability in the business on account of various factors. OCL is a manufacturer 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. Though OCL claims to be a leading manufacturer of wedding cards, it should be noted that its reach is currently limited to the Chennai/Tamil Nadu area. We believe that the company will face stiff competition when it tries to expand to other areas, as there are numerous other players and the industry itself is highly fragmented in nature. If the company starts advertising the products to reach the masses, its margins may be impacted.

We also had said that OCL lacks a competitive edge, as its business model can be easily duplicated. The company does not 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 will have to share 2% of its revenues with the other promoter entity from 2015 onwards. Looking at its net margins, which stand at about 6%, the revenue sharing may mean a loss for the shareholders.

In FY11, the company reported 31 per cent growth in its topline to Rs 45.72 crore and its bottomline also showed 68 per cent growth to Rs 2.18 crore. In the first 9-month period of this fiscal, its income and net profit stood at Rs 32.72 crore and Rs 1.93 crore respectively.

We believe that the valuation looks very steep at its PE of 24x (post diluted equity) and is not justified for such a small company. The stock got listed at a price of Rs 30 per share in the morning, but has already lost about 5% in the morning sessions. As per the new IPO norms, the circuit limit for OCL would be 5% today and it has already hit that bar. The stock will remain in the ‘T’ category for the next 10 days. We believe that the scrip may show fall in the coming sessions, and hence advise investors to exit the counter.