Servalakshmi Paper (SPL), is tapping the IPO market with an issue size of `60cr in the price band of `27–29/share, thus resulting in a public issue of 2.2cr and 2.1cr equity shares at the upper and lower price bands, respectively, of face value `10, resulting in a dilution of 49.7% and 47.9% stake. SPL has embarked upon setting up an integrated paper mill with a capacity of 90,000mn tonnes per annum along with a 15MW captive power plant at a single location. The total investment is estimated to be `340cr and the entire project is to be completed in two phases. Phase-1 of the project has already been completed and the company’s plant has commenced commercial operations from April 2010. Money raised through the IPO would be used for Phase-II, under which SPL plans to add balancing equipment for improving productivity and manufacturing value-added products. Funds would also be utilised for working capital needs.
Outlook and valuations
Given that the best players in the industry have RoE of 14–16%, with cost of equity for the top Sensex companies in a similar range, we believe investors should approach investment in such a sector cautiously. SPL’s plant has started its operations recently, thus the company will take some time to make profits. Further, given the nature of the industry, any sort of price correction in paper prices would lead to delay in profitability.
At the end of 6MFY2011, SPL had net worth of `40cr, while it plans to raise `60cr through 50% dilution, which would value the company at `120cr, i.e., P/B of 1.2x. Even at the lower price band of `27, SPL would trade at a P/B multiple of 1.20x (1.24x at upper band), while its peers, which are profit-making and have longer history of operations, are currently trading at an average P/B of 1.2x – thus placing the stock relatively expensive. Hence, we recommend Avoid on the IPO.
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