IPO Review: Servalakshmi Paper (SPL)

 

IPO details

Company Name: Servalakshmi Paper (SPL)

Issue Date: April 27-29-2011

Issue Size: 60 crore

Price Band : 27-29 per share


THE Coimbatore-based Servalakshmi Paper (SPL), which is into manufacturing of printing and writing paper and newsprint, is raising funds from public to augment its second phase of capacity building. Of the total project investment of 340 crore, the company has already spent 280 crore in the first phase, leading to capacity generation of 90,000 tonnes per annum.

   In its second phase, the company is looking at expanding its manufacturing capacity by 18,000 tonnes per annum. The company has installed a co-generation power plant with a capacity of 15 mw to cater to the power requirements of its plants. The company generates income from selling surplus power of 3 mw to the Tamil Nadu Electricity Board. Some 90% of the paper manufactured by the company is eco-friendly as it is recycled from imported waste paper. SPL intends to earn 20% of its revenues from exports and steadily increase this to 30-40% of revenues over the next two years. However, there are some concerns which investors must take note of before investing in the issue. The company is part of the Servall business group which has had presence in the paper industry over the last four decades. However, in the last five years of its incorporation, there is hardly any earnings visibility. Rather it has piled up a debt of 261 crore on its books. While the commercial production of paper and power has begun since April 2010, the company has posted revenues of 39 crore, an operating profit of a mere 1.7 crore and a net loss of 14.9 crore in the first seven months of operation. Whether raising funds aggregating 60 crore could lead to a reversal of the fortunes of the company is a moot point. It is difficult to envisage the company achieving break even by the fiscal 2012, given the huge debt to be serviced and high interest and depreciation costs. Any turnaround in the bullish paper cycle may significantly curtail estimated future earnings of the company.

   The public issue of company's shares, though fairly priced at a little over one time of price to book value, appears to be expensive in view of its weak finances. Moreover, the fact that the promoters are diluting half their stake does not reflect very well their confidence in the company's growth.

   The firm trend in paper prices and the recent acquisition of Andhra Pradesh Paper Mills at high valuations by a global firm have triggered a bullishness in the domestic paper industry. However, investors need to be wary of investing in such companies without any proven track record of growth. With no clear visibility of earnings, investors could expose themselves to a significant execution risk. They would be better-off opting for other companies in the paper industry with a proven track record of growth.