June 06, 2006

Vigneshwara Exports Limited - Another IPO

Well it looks like the stock markets just loves to see an IPO every week. So next in line is this company. The company is based out of Mumbai and the office is in Parel, a place where I was staying for two months. However, the place has seen tremendous appreciation of land value, but as this place is only the registered address and also since I have not seen the place I shall not comment on it. Anyways, coming to the IPO, the issue has been priced between Rs.121 and Rs.140. The IPO looks to gather around 50-60 crores from the market. Compared to the previous issues from ICICI, ONGC and possibly the DLF issue, this looks like it will hardly have any impact on the market and will comfortably sale through even the company does not advertise in the market.

This issue is not fraught without risks.

First, that comes to my mind is the promoters stake. The promoters are diluting their stake in the company to below 50%. I do not understand the reason for such a drastic step for the company.

Second, the company was into diamond trading for the past five years. Post this issue the company is planning to exit from this business. Now, that is something that needs attention. The company has entered into a field where the competition is already on the higher side creating heavy pricing issues. This should have been forecasted before entering. However, the company seems to have taken the poison pill and have decided to move from it.

Third, VEL is getting regular business from existing customers. Its top 5 clients have account for more than 75% of the business. Though this has been reducing over the past few years, this is one factor that I would be keen to looking at during the coming few quarters of the company. The company is a regular in a show in Germany for the past 15 years but it has not been able to increase its customer base for these many years. One should give this some thought.

Fourth, the company's pricing policy without using LC. As far as the customer is a regular for the company, this strategy works fine, else one would consider the risk for non-payment.

Fifth, the company's capital structure-post 2003, the company has changed the capital structure 7 times by bringing in fresh capital. However, the company has always issued the capital at extremely low cost to the promoters. Till 2005, the company issued at Rs.60 to the promoters. This was increased to Rs.100 in a month. I have no reason why things changed dramatically in a span of couple of months. The promoter will actually double his returns on his investment made last year. However, if one looks at the issue, the company has issued to the promoters at about 6-8 times earnings. Sometimes, I do wonder, if it right for the promoters to have issued the shares at such low prices when he knows that he has the option to dilute his stake when he brings his company to the public. Finally, a small irrelevant issue, the company's prospectus was mostly referring to the opportunity in US when it hardly has operations in that country. The company only has plans to enter into this market after the issue.


While we have spent our time on the negatives of the company, here's the brighter side. The company has been growing aggressively. Assets have grown by more than 14%. Inventories though has been a problem with certain years of poor forecasting, but the company has increased its sales by more than 150% in the past five years. The company has a CAPEX of 200 crores in the next few years and have lined up their capital. The company is making use of the Technology Upgradation Fund provided by the government. The rest is being funded by the IPO which is expected to raised about 55-63 crores. However, the company has sales of around 1200 crores for the past couple of years. I like the industries' prospectus with immense potential to grow.


The company's capacity utilization has been below expectation and the bottlenecks seems to have created the problem which is being addressed with the cash inflows from the IPO. The company is increasing reliant on external supplies for its raw materials. Though this will be reduced by the IPO, this still is a concern that should be addressed by the company. The company's will be investing in heavy machinery. Hence the company should see a higher tax benefit and some security to the cash flows. The company has faced problems in dispatching within deadlines. With no cover from LC, one needs to know if there could be some risk. Power will be a concern for the company but the company seems to have addressed this issue-by hoping the government will provide with the necessary fuel.

I still am not quite clear if this company will provide the necessary appreciation that one is looking at. The cash flows which still hits me constantly is the main source of concern. However, I do hope the company will be able to manage the cash flows better. Also, the company's pricing policy at Rs.121 - Rs.140 will make it expensive today when compared to its peers. But Invest thinking of the future of the industry.

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