Eco Friendly Food Processing Park IPO Review by Naman Sec (Avoid)

Review By Naman Securities and Finance Pvt. Ltd on December 27, 2012

Eco Friendly Food Processing Park Ltd. (EFFPP) IPO, which opened today (till 31, December 2012), is to be listed on the Bombay Stock Exchange's SME platform. The BSE SME exchange guidelines are similar to EFFPP plans to raise Rs 7.5 crs for expanding its organic farming operations and for constructing a storage shed. The issue price has been fixed at Rs 25 per share, with a minimum order quantity of 6000 shares or Rs 1.5 lakhs. Retail, QIB and non-institutional investors can bid for 83.23% of the issue size, with the remaining reserved for the market makers. In this post, I elaborate the reasons for recommending an 'avoid' to the IPO.

Promoters new to the business!

EFFPP, incorporated in July 2008 was originally promoted by Mr. Rakesh Kumar Mishra and Mr. Tapas Kumar Pal (together they held 20% of the paid up capital). While the latter resigned the company in January 2011 owing to 'preoccupation' as stated in the DRHP, the former resigned in March 2012 for reasons not mentioned. Mr. Manoj Narain Agarwal, who held 40% of the paid-up capital in 2010, too resigned in the same month. Thus,the current promoters, Mr.Brij Kishore Sabharwal and Mr. Amar Singh Bisht are on board since March 2012 and fairly new to the overall business. Such a quick churn at the top-most managerial positions within two years of incorporation is unsettling for investors. Since, the current promoters are new to the company, it is difficult to ascertain their track record.

Conflict of interest with a group company is a concern

The current promoters of EFFPP are also the promoters of a group company Esteem Bio Organic Food Processing Ltd. (EBOFP) which is engaged in the similar business of cultivating wheat, paddy, fruits, vegetables and wood plantation in the Uttarakhand state. The other similarities: a) EBOFP, too has filed a DRHP for listing on the BSE SME exchange; the primary objective of the IPO for both the companies is to develop the farm land for transition to organic farming b) The current promoters acquired majority stake in EBOFP in March 2012, with the resignation of the original promoters Mr. Manoj Gupta and Mr. Hari Kishan Gupta. The EBOFP DRHP mentions that one of the current promoters Mr. Bisht has resigned due to 'preoccupation' with effect September 2012. c) The independent directors are common to both the companies.

Clearly, these two entities are inter-related in many ways and coupled with the absence of a 'no-conflict' agreement, doubts may be raised on the promoter's ability to act in the best interests of both the firms.

Primary objective to transition to organic farming

Of the Rs 7.5 crs that the company plans to raise through the IPO, Rs 5 crs is for the purpose of developing the farm land to transition to organic farming. Organic farming activities are rapidly growing in India given the health and environment benefits along with high export demand. Hence, it is a step in the right direction. However, the company is yet to receive the approval from the Gram Panchayat for the soil bed. Any delays is receiving the approval will delay the deployment of funds, thereby suppressing the RoE post the public issue.

Conclusion / Investment Strategy

Expensive valuations; avoid the IPO

For valuations purposes I have compared the trailing PE multiples of REI Agro, KRBL, Lakshmi Energy and Foods Ltd. and Usher Agro with that of EFFPP. Since agri-commodity business are inherently subject to extreme volatility due to weather conditions and commodity prices, it is a safer bet to look at the trailing multiples rather than the forward multiples. At the issue price of Rs 25, the implied trailing PE multiple for EFFPP is 7.0x, same as the average trailing PE multiples for the four companies mentioned before. In my opinion, EFFPP should trade at-least at a discount of 15% from its peers considering a) it is very small in revenue terms compared to its peers - Usher Agro the smallest of the other four players - is 200 times the size of EFFPP in revenue terms! b) since the management is new scaling up operations is a key monitorable c) conflict of interest with a group company.

At a PE multiple of 6x, I arrive at a fair value of Rs 21-22 indicating downside to the issue price. The listed peers of EFFPP are relatively better priced hence the EFFPP issue is best avoided.

Reviewer recommends Avoid to the issue.