HPC Biosciences: Ready To Reap Capital Market Advantage

Recently, the Bombay Stock Exchange (BSE) has launched trading platform called BSE SME for Small and Medium Enterprises (SME). There are already 12 SMEs which have listed on this platform. HPC Biosciences (HPC) is another SME that wants to list on this platform. The issue opens on March 1, 2013 and will close on March 5, 2013.

HPC is planning to raise Rs 15.75 crore by issuing 45 lakh equity shares of face value Rs 10. The company has decided to offer these equity share at a fixed price of Rs 35 per share. The reservation for market makers is 2.32 lakh equity shares. The issue and net issue excluding market maker reservation will constitute 28.30% and 26.48% respectively of the post issue paid-up equity share capital of the company. Guiness Corporate Advisors is the lead manager for the issue.

The company intends to use its issue proceeds for the purpose of development of greenhouse cultivation, development of farm land for transition to organic farming, strengthening supply chain management, procurement of farm tools and equipments and meeting its working capital requirements.

HPC was established in 2002 and is engaged in agricultural activities like cultivation, processing and distribution of agricultural commodities such as wheat, paddy, sugarcane, fruits, vegetables and flowers. The company also carries out wood plantation of bamboo, poplar, eucalyptus and kadam. In the recent past, it has also initiated the cultivation of organic fruits and vegetables in its farms. HPC has control over 400.66 acres of land situated at Anandpur, Pant Nagar in Uttarakhand.

Further, HPC has entered into a contract farming agreement with landowners, wherein it has acquired agriculture rights of agricultural lands in consideration of a share of the crops grown. The company has adopted a sharecropping model of farming, wherein it gives contracts to farmers and workers available in the vicinity of its farms. The company's farm managers along with farmers decide the crops to be grown. Accordingly, the farmers and workers are allotted demarcated farm land to grow their respective crops. Further, farmers and workers get a direct share of the crops after harvesting. The sharing ratio ranges between 20%-30%. This model of crop sharing encourages farmers to work harder and use better techniques to grow high quality crop. The company continuously supervises the farmers to constantly monitor the quantity and quality of crops.

HPC has commenced its agriculture operations since 2011, but there was no commercial activity in that year. For FY2011-12, the company has posted Rs 3.68 crore in revenues. Its net profit stood at Rs 3.05 crore during the same period. Further, HPC is expected to post revenue of Rs 5.26 crore and net profit of Rs 4.43 crore for FY2012-13E, annualised on the basis of financial statement till November 30, 2012.

On the valuations front, the offer price is quoted at 18.23x and 12.54x HPC's EPS of Rs 1.92 and Rs 2.79 for FY2012 and FY2013E respectively. However, this valuation is far more expensive than that of another recently listed SME company, Eco Friendly Food Processing Park, whose equity shares were offered at 12.93x its FY12 EPS of Rs 1.89 (i.e. Rs 25 per share). Further, the other listed peers, REI Agro and Usher Agro, are trading at just 4.17x and 5.49x respectively of their FY2012 EPS.

Hence, looking at past trends in the performance of listed agricultural processing companies, HPC should justify its valuation in the coming future as the company has newly started its operations in FY2012. In light of the fact that HPC does not have an established performance in the past, the issue price seems to be too expensive in the domestic markets. Apart from higher valuations, retail investors may also face difficulties due to the fact that the lot size for applications is in multiples of 4000 equity shares. So, for the minimum equity share application, individual retail investors would need to set aside at least Rs 1,40,000, which is a considerable amount for any retail investor despite the ASBA process for application.