Avoid Vishwaraj Sugar Industries: Choice Broking
Karnataka based sugar manufacturer, Vishwaraj Sugar Industries Ltd. (VSL) is planning to raise up to Rs. 550 – 600mn through an IPO, which opens on 30th Sept. and closes on 04th Oct. 2019. The price band is Rs. 55 – 60 per share. • The issue is a combination of fresh and OFS. The company will not receive any proceeds from the OFS. Of the net proceeds from the fresh issue, Rs. 157mn would be utilized to fund the working capital requirement and the rest will be used for general corporate purposes.
The financial performance of VSL in the last five fiscal is not encouraging. Due to its presence in a key political agri commodity like sugar, it is a victim of unfavorable sugar industry pricing policy of the government. The company has reported net loss in three fiscals out of the reported five fiscals. Over FY15-19, the company has reported 2.9% CAGR decline in the total operating revenue to Rs. 3,068mn in FY19. Over the period, the top-line was impacted by the volatility in the sugar crushing volume and subdued sugar price. Depreciation charge increased by 7.2% CAGR, while finance cost increased by 22.6% CAGR over FY15-19. Other income declined by 29.1% CAGR, leading to a pre-tax loss in three fiscals out of reported five fiscals. • Working capital cycle increased from 387 days in FY15 to 424 days in FY19, and was primarily due to an average inventory days of 459 days over FY15-19. This mainly led to higher debt, which increased by 9.1% CAGR, with debt-equity ratio increasing from 1x in FY15 to 1.6x in FY19. Net debt to EBITDA too remained at higher levels during the period. Average RoCE and RoIC for the period was 6.5% and 5.1%, respectively. • On valuation front, at higher price band, VSL is demanding an EV/Sales multiple of 1.8x as compared to 0.9x of the peer average. With the proposed distillery expansion plan, the company is well placed to benefit from the higher ethanol blending with petrol. However, the level of profitability will depends in the cost of production of ethanol vs the ethanol price fixed by the government. With its diversified product offering and target to reduce the reliance on sugar business, the company seems to be a good play for mid to long term, but not in the near term. • The issue is combination of fresh and OFS. The shares tendered from the promoter & promoter group (P&PG) forms around 91.5% of the OFS size. Post-issue P&PG shareholding to be at 32.83% as compared to 54.22% pre-issue. Thus considering the above observation, we assign an “AVOID” rating for the issue
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