Gokul Refoils and Solvent Limited IPO Review (Apply)

Review By Chittorgarh.com Team on May 4, 2008

Issue Opens: THURSDAY, MAY 8, 2008
Issue Closes: TUESDAY, MAY 13, 2008
Price Band: Rs 175 - Rs 195 per share
Face Value: Rs 10 per share
Issue Size: 7,158,392 Equity Shares
Issue Size in (Rs Cr.): 139.58 at upper band / 125.27 at lower band
Issue as % of post issue share capital: 27.14
Equity Shares outstanding prior to the Issue: 19,220,608 Equity Shares
Equity Shares outstanding post the issue: 26,379,000 Equity Shares
Listing on: NSE and BSE
Market Capitalization at upper band (Rs Cr.): 514.39
IPO Rating by ICRA: 3/5 (This grade indicates that the fundamentals of the issue are average, pursuant to the SEBI Guidelines.)

Issue objects

Setting up of a new 1500 TPD Soyabean processing plant near Gandhidham, Gujarat
The Gandhidham unit of GRSL is currently into refining of palm & soyabean oil and vanaspati manufacturing. As a step towards backward integration the company has set up a Soyabean processing plant including crushing, refining and extraction facilities. The output of the new plant i.e soyabean oil will be an input of the existing refinery, thereby increasing the overall capacity utilisations of the refinery during the season wherein imports of oil are not economically viable vis-a-vis purchase of local oil. The seed processing capacity has already started trial runs.
Fund Requirement (Rs Cr.): 51
Expansion of existing edible oil refinery at Surat from 100 TPD to 400 TPD
The Surat unit of GRSL is currently into oil refining having a capacity of 100 TPD. The company now intends to add another 300 TPD refining capacity taking the total capacity of the plant to 400 TPD. GRSL intends to import oil through Dahej port or Hajira Port and process it at Surat, so as to cater to south Gujarat and Mumbai markets. The expansion plan is already under implementation with the orders for plant and machineries been placed.
Fund Requirement (Rs Cr.): 12.31
Investment in wholly owned subsidiary in Singapore
Singapore is the global hub of edible oil industry with all major oil suppliers having a base in Singapore. It will help Gokul in procuring oil at reasonable terms and also providing assured supplies round the year. This shall further strengthen Gokul's procurement base and ensure continuous supply of raw material for its refining mills in India. This global presence shall help it to improve the scope of exports of De-oiled Cake and its margins in export of De-oiled cake. The subsidiary shall procure raw materials and trade in edible / non edible oils and their derivatives.
Fund Requirement (Rs Cr.): 25
Long term working capital
Fund Requirement (Rs Cr.): 60.69
Investment in increasing warehousing capacities and continuous Capex for existing units.
Fund Requirement (Rs Cr.): 10
The company also plans to raise an additional Rs 382.5 million through bank loans to finance the above projects.

The promoters made a modest start by setting up a small seed processing unit and trading in Edible oils.
The company was incorporated in 1992 and setup a Solvent Extraction plant and an oil refinery at Sidhpur, Gujarat.
In 2003 company setup the Gandhidham unit with a refinery of 800 TPD and Vanaspati plant of 100 TPD.
In 2006 four environment friendly wind mills of 1.25 MW each were set up, in Kutch.
In 2007 the company purchased a 100 TPD operational refinery in Surat and increased the Vanaspati capacity from 100 TPD to 200 TPD.
Towards expanding the scale of operations and having global presence Gokul setup two wholly owned subsidiaries in Mauritius and Singapore.

Company Business

The company is in the following line of business:
a) Seed processing and Solvent Extraction: Oil cake, Solvent extracted oil and De-oiled cake
b) Refining of crude Edible oil to produce refined Mustard oil, Soyabean oil, Sunflower oil, Groundnut oil, Cottonseed oil,
Palm oil,
c) Hydrogenation of oil to produce Vanaspati ghee
d) Captive power generation plant
e) commodity trading in domestic and international markets
At present Gokul has 680 TPD of seed processing, 600 TPD of Solvent Extraction, 1200 TPD of refining and 200 TPD of Vanaspati manufacturing capacities.
Apart from India, Gokul's products are exported to USA, European, South East Asian and other countries.

Financial Statements Data
(Rs Cr)	8N07	YM07	YM06	YOY	YM05
Total Income	1347.8	1599.9	1259.7	27.00	1123
Net Profit	41.82	25.72	12.38	107.75	19.99
Net Profit Margin	3.10	1.61	0.98		1.78
Net Worth	172.92	126.47	100.60	25.72	87.91
Fixed Assets	161.57	115.47	69.36		55.13
Inventories	316.93	163.66	99.20		82.93
Cash and bank balances	74.69	50.80	57.91		97.52
Loans and Advances	30.71	18.57	16.38		15.67
Sundry Debtors	92.79	98.63	48.66		41.29
Long Term Debt	133.02	89.57	29.52		31.96
Current Liabilities	363.90	230.26	153.66		160.83
Deferred Tax Liability	12.03	11.26	6.33		6.38

Issue Related Facts
No of Shares before the issue (Cr)	1.92
No of Shares after the issue(Cr)	2.63
Share Price at upper band	195
Share Price at lower band	175
Net Worth after the issue at upper band (Cr)	312.50
Net Worth after the issue at lower band (Cr)	298.19
Book Value after the issue at upper band (Rs)	118.82
Book Value after the issue at lower band (Rs)	113.38

Valuations
EPS(last twelve months) (Rs)	23.85
Price Earning Ratio at upper band	8.18
Price Earning Ratio at lower band	7.34
Return on Average Net Worth (%)	27.94	22.65	13.13
Return on Average Capital Employed(%)	16.02	14.86	9.90
Long Term Debt/Equity at upper band	0.43
Long Term Debt/Equity at lower band	0.45
Price to book value at upper band	1.64
Price to book value at lower band	1.54

Legend
8N07: 8 months ending November 2007
YM07: Full year ending March 2007
YM06: Full year ending March 2006
YM05: Full year ending March 2005

Industry overview

India is world's third largest edible oil economy, after China and US. India's annual consumption is around 10 million tonnes vis-à-vis China's 14.5 million tonnes. However, India's per capita consumption at 10.2 kgs per annum is considerably lower compared to global standards Since 1995,Indian share in world production of oilseeds has been around 8-10% Approximately one third of the demand is met by imports.
Edible oil processing consists of three operations: crushing and expelling (separating oil from the solids), solvent extraction (to chemically remove residual oil from the oilcake solids), and oil refining.
Edible oils constitute an important component of Indian households' expenditure on food. A large Population and steady economic growth are important contributors to India's increasing consumption and imports.
The premium in terms of crushing margins is likely to be hit due to lower domestic production. Refining margins (from crude edible oil) and marketing margins (branded sale) are likely to remain robust due to rising demand. Overall, the near term outlook for the solvent extractors and edible oil producers / marketers remain positive.

Peers

Other Listed Players in the Edible Oil Business

1. Ruchi Soya: Groundnut oil, Soyabean oil, Sunflower oil,Mustard oil, Palm Oil & Vanaspati

2. K. S. Oil: Mustard oil, Vanaspati, De-oiled Cake, Soya refined oil

3. Vimal Oil and Foods: Cottonseed, Groundnut, Soya, Mustard & Palm

Peers comparison

KS OIL				RUCHI SOYA
	YM08	YM07	YOY	YM08	YM07	YOY
Total Income	2051.6	1071.58	91.46	11020.49	8569.87	28.60
Net Profit	122	57.32	112.84	157.37	102.96	52.85
Net Profit Margin	5.95	5.35		1.43	1.20
Shares	33.24			18.88	18.88
EPS	3.67			8.34	5.45
Share Price	82			101
PE	22.34			12.12
M Cap	2725.68			1906.88

Reason to invest

1. Established position and experienced management

Established position in the edible oils industry & locational advantage arising from close presence to ports as well as oilseed growing belt.The promoters have long experience in this line of activity.

2. Versatile manufacturing capabilities

Ability to process various types of oils including Palmolein, soyabean,cotton, sunflower, groundnut and mustard. The existing setup is such that Gokul can switch over from processing of one type of oil to another type of oil with the no down time.

3. Growth prospects of Indian edible oil market

Buoyant growth prospects for the edible oil market in India.

4. Distribution Network

A well established network spread across 19 States catered by 18 C&F agents and their 802 distributors, 3 depots, 15 brokers and their 295 resellers, distributing products through a total 1133 bulk points of presence.

5. Increasing retail share
Gokul succeeded in increasing its retail sales approximately from 18 % to 30 % which has significantly helped it to improve the margins. The portion of retail sales were 37% during the eight months period ended November 30, 2007.

Reason not to invest

1. Significant Competition

During the financial year 2006-2007, the edible/non-edible oil sales accounted for 86.6% of Gokul's total revenue. We face intense competition from both its direct competitors and bulk importers of edible oil in India.

2. Government Policy

Any significant change in the government policies relating to Excise and Customs could adversely affect Gokul's business.

3. Commodity Trading

Gokul is engaged in trading. The edible oil trade is speculative in nature and could lead to significant losses.

4. Low Margins

The business is characterized by inherently low margins.

IPO Grading

This Issue has been graded by ICRA Limited as 3/5 indicating Average Fundamentals, pursuant to the SEBI Guidelines.

Investment Strategy

Listing Gains

1. Listing gains possibility depends on the market sentiment at the time of listing.

2. Considering that issue is priced at very reasonable valuations chances of loosing money are slim. But in case market crashes market price can dip below the issue price considering that Gokul is not a very big name.

3. Predicting listing price is totally speculative but if we were to speculate Gokul should list at Rs 250.

4. It would be un-reasonable to expect a share price of more than 275 shortly after listing.

Long term Gains (atleast 6 months)

1. Investors subscribing for long term should get a decent return on their investment.

Conclusion / Investment Strategy

1. Gokul is an established player and should be able to compete well in highly competitive and inherently low margin edible oil business.

2. Edible oil market in India will grow considering increasing consumption and economic development of India which presents a good opportunity to Gokul.

3. With increasing retail share Gokul should be able to increase its net profit margins

4. Valuations of Gokul are very reasonable considering price earning multiple of around 8 at upper band (annualized for 8 months ending November 2007). Gokul also compares favorably with its peers like K.S. Oil (price earning multiple of around 22) and Ruchi Soya (price earning multiple of 12). Price to book multiple of Gokul at upper band is 1.64 which is again very reasonable

5. Gokul has a reasonable debt with its debt equity ratio at 0.45. Return on Net Worth has improved over the years and is quite decent at 27% for the 8 months ended November 2007. Return on Capital Employed is not good at around 15%.

6. Based on the above parameters we recommend subscribing to the issue.

Reviewer recommends Subscribing to the issue.

Review By Chittorgarh.com Team on May 4, 2008