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Servalakshmi Paper Ltd IPO Review (Avoid)

Review By MLR Securities Private Ltd on April 28, 2011

Issue Date: 27th to 29th April
Price Band: INR 27 to 29
Issue Size: INR 600 mn
Mcap: INR 1239 mn
Public Holding: 48.86% (Post Issue)
IPO Grading: ICRA IPO Grade 2
BRLM: Keynote

Servalakshmi Paper Ltd (SPL) is promoted by the Tamil Nadu based Servall Group. Servall Group is into the production of paper, paper producing machinery and consultancy for turnkey projects in paper industry.

SPL was incorporated in Nov05, however the commercial production started in Apr10. The company manufactures PWP (printing & writing paper) and NP (newsprint). The production plant is in Tamil Nadu and has a capacity of 90,000 TPA. The company is also has a captive co-generation power plant with a capacity of 15 MW.

Financials & Valuations


  • The project cost was estimated at INR 3,400 mn and the project was supposed to be completed in two phases
  • The company has already completed phase one of the project with an expense of INR 3,020 mn and the commercial production of PWP & NP started in Apr10
  • The issue proceeds of INR 600 mn will be used to meet the expense for the second phase of the project in which the company plans to add equipments for manufacturing of value added products, and also to meet the working capital needs
  • The expense for the first phase of the project was met by INR 400 mn of equity and INR 2,620 mn of debt which resulted in high debt equity ratio of 6.5 which is likely to come down to 2.5 post issue
  • The commercial production started in Apr10 and in 6mthFY11 the company did a Net Sales of INR 391.8 mn and an EBITDA of INR 23.1 mn, however the company made a loss of INR 149.0 mn at the PAT level
  • India constitutes 16.5% of the world's total population; however, it consumes only 1.53% of the world's total paper production and demand growth for PWP & NP in India is healthy, however the capacity addition is happening at a much faster pace which has led to increased competition and hence pressure on realizations.

Conclusion / Investment Strategy

Investment Rationale

At the average of the price band (INR 28.5) the stock is valued at 1.2 x post issue book value of INR 23 while larger and established players in the industry like BILT, TN News Print, etc are trading close to book value. Although the paper mill has a total production capacity of 90,000 tonnes per annum and ranks within fifteen major plants in India we believe that the IPO is over priced at 1.2 x BV (post issue) and recommend avoiding this issue.


Reviewer recommends Avoid to the issue.

Review By MLR Securities Private Ltd on April 28, 2011