Kushal Tradelink’s IPO To Cost Rs 35 Per Share

Kushal Tradelink (KTL) is gearing to tap the primary market with its IPO on the SME platform of the BSE. The company has proposed to offer 79.30 lakh equity shares to raise an amount of Rs 27.76 crore. The entire issue will be based on a fixed price issue of Rs 35 per share with a face value Rs 10 each. The offer comprises of 4.10 lakh equity shares reserved for the market makers, whereas the remaining 75.20 lakh equity shares is the net issue portion. The issue will open on Aug 14, 2013 and will close on Aug 21, 2013.

Further, the issue and the net issue constitutes of 33.42% and 31.69% of the post-issue paid-up equity share capital respectively. The lead manager for the said IPO is Aryaman Financial Services.  

The Gujarat-based company KTL operates as a trader of natural paper. The company is one of the leading wholesalers in Ahmedabad, Gujarat. It purchases paper from the paper mills and supplies it to various customers like newspaper agencies, packaging product businesses etc. The company's core business comprises of products such as kraft paper, Duplex board and waste paper. It also deals in news print paper and reel core & copier paper.

Presently, KTL has three stocking facilities located in Ahmedabad, Gujarat, which also include certain processing facilities like sheet-cutting, rewinding, bailing, reel to sheet making etc. The KTL group companies include Kushal Infrastructure and Ashapura Paper Mills.  

On the financial front, the company posted healthy results in FY12. Its topline grew by 64% to Rs 186 core in FY12 as against Rs 113 crore in FY11. The bottomline grew by 47% to Rs 1.39 crore. However, KTL's expenses increased by 64% to Rs 184 crore in FY12, mainly owing to an increase in expenses on purchases. The company has shown a consistent growth in the previous years.

The paper company intends to utilise the net proceeds for its expansion purpose and to meet its long-term working capital requirement. KTL proposed to invest Rs 10 crore to set up a new corporate office at Ambawadi, Gujarat to stretch its scale of operations. An amount of Rs 15.75 crore will be reserved for its working capital requirement.

KTL has quoted an issue price of Rs 35 per share, which is trading at PE 39.67x of EPS Rs 1.5. This seems to be quite expensive for the issue. Though the company has posted good results in the previous years, the margins are very low due to the trading nature of business. The EBITDA margin stood at 4%, whereas the net margin at 0.75% in FY12. 

Considering the company’s business area, its major competitors are the paper manufacturing companies, which produce their own papers and market it to packaging and other sectors. Also, KTL operates in a very limited area. Considering all the above factors, we recommend readers not to subscribe to this public issue.