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Rushil Decor Ltd IPO Review (Avoid)

Review By MLR Securities Private Ltd on June 20, 2011

Issue Date: 20th to 23rd June
Price Band: INR 63 to 72
Issue Size: INR 381 mn
Mcap: INR 972 mn
Public Holding: 37.5% (Post Issue)
IPO Grading: ICRA IPO Grade 2/5
BRLM: Corp. Strategic Allianz

RDL is into the manufacturing and marketing of Laminated Sheets. The company has an installed capacity of 30 LPA sheets. RDL has also set up a Plain Particle (PP) Board manufacturing unit in the year 2009 with an annual capacity of 1,376,000 sq mt and has plans to set up a Medium Density Fibre (MDF) Board manufacturing unit with an annual capacity of 90,000 cu mt. The project cost of the MDF Board manufacturing unit is INR 73.4 cr and will be funded by INR 44 cr of debt and the rest through issue proceeds.

Investment Rationale

  • The demand for the company's products are likely to increase led by growth in Real Estate and furniture industry, however the Laminate Sheet, PP Board and MDF Board market is highly competitive and fragmented.
  • The capacity utilization in the Laminated Sheets segment has remained stagnant at 75% over the last four years, the capacity utilization in PP Board segment for six months ended Mar'10 was 34.3% (the unit started operations in Oct'09), MDF Board unit is likely to start operations from Oct'11 onwards.
  • The company used cotton stalk, paper, petrochemicals which are mostly imported. Any adverse movement in raw material prices and/or currencies can affect profitability. Also the company's 50% of Revenue is from exports.
  • The annualized Revenue for 9mth ended Dec'10 was INR 128.8 cr vs INR 102.6 cr in FY10 and showed a growth of 25.2% YoY mainly because of improvement in realizations and inflows from PP Board segment.
  • The PBDIT Margin was 11.7% for 9mth ended Dec'10 vs 12.8% in FY10 , the decline in PBDIT Margin was mainly due to slight increase in raw material prices.
  • The PAT margin for 9mth ended Dec'10 was 3.9% vs 3.7% in FY10, although the PBDIT Margin declined the PAT margin remained stable due to lower taxes.
  • The annualized EPS for 9mth ended Dec'10 was INR 5.7 vs INR 4.4 for FY10 and saw a growth of 29.7% YoY mainly led by increase in revenues.
  • The Debt Equity Ratio for 9mth ended Dec'10 was 2.8 (INR 25.1 cr equity & INR 71.3 cr Debt), the company has plans to raise additional equity of around INR 38.1 cr through this IPO and is also borrowing INR 44 cr through term loan. Post issue the Debt Equity Ratio will come down to 1.8, however there will be an Equity Dilution of 64.4%.


Conclusion / Investment Strategy

At the average of the price band (INR 67.5), the stock is valued at 11.8x annualized EPS of INR 5.7 for 9mth ended Dec'10. The capacity utilization in Laminate Sheet segment has been stagnant at around 75% for last four years, also the PP Board segment is operating at low capacity utilization rates. The company expects the MDF unit to be operational by Oct'11, however the MDF unit is also likely to operate at low capacity utilization rates. Hence there is a significant threat to EPS post Equity Dilution.

Reviewer recommends Avoid to the issue.

Review By MLR Securities Private Ltd on June 20, 2011