Olympic Cards IPO Review by KM Global (Avoid)

Review By K.M. Global Financial Services Ltd on March 9, 2012

Issue Period: Mar 9 - Mar 13
Price Band (Rs): 30-32
Issue Size (Rs Cr): 25
Mcap (Rs Cr): 51-54
Grading: CRISIL Grade 1
Promoter: Noor Mohamed, S Jarina
Listing: BSE
Grey Market (Rs): 3-3.5
BRLM: Ashika Capital

Olympic Cards incorporated in 1992, based in Chennai is a manufacturer and trader of wedding and greeting cards, business cards, envelopes, letterheads, calendars, notebooks account books and printing inks. Its manufacturing facility is also located in Chennai with an installed capacity to produce 177 mn pieces. Its clients base include both wholesalers and retailers. OCL meets its key raw material requirement of paper and boards through dometic suppliers as well as imports from Indonesia and Honk Kong.

It started exporting wedding and greeting cards, visiting cards, envelopes and printing inks to Malaysia, Singapore, Sri Lanka and Dubai which accounted for only 1% of FY11 sales.

Mr H. Noor Mohamed, his wife Mrs S. Jarina and his son Mr N. Mohamed Faizal are the promoters of the company. Mr Noor Mohamed has over 38 years of experience in the printing industry and is presently the president of 'Tamil Maanila Card Manufacturers' Association'.

Objects of the Issue (Rs Cr)

To set up new manufacturing unit near Chennai 19.8
Capex for establishing 4 own retail outlets 3.2

Profitability - OCL's sales grew at a CAGR of 23% during FY07-FY11 to Rs 38.5 Cr while PAT witnessed a growth rate of 66% during the same period to Rs 2.2 Cr in FY11 majorly due to increase in contribution from the wedding cards segment. In 9mFY12 the company reported total income of Rs 32.6 Cr with a PAT of Rs 1.9 Cr.

Capacity Utilisation - The company increased its capacity from 123 Mn units in FY09 to 177 Mn units in FY11 with an improvement in capacity utilization rate from 82% in FY09 to 91% in FY11. The company expects to take total capacity to 241 Mn units by 2014.

Margins - EBITDA margins improved to 18.5% in FY11 from 10% in FY09 on the back of increase in volumes. PAT margin also witnessed the same trend, it expanded from 2.9% in FY09 to 5.7% in FY11.

Decent RoE - As earnings improved return on equity also improved to 20% in FY11 compared to 16% in the previous period. In 9mFY12 it delivered an RoE of 16%.

Leverage - The debt to equity is high at 1.2 because of continuous capacity expansion. However, post issue it will fall to 0.4. The area of concern is high inventory days which shot up to 231 days in FY11 from 100 days in FY07.

Concerns

Geographical Concentration - OCL's existing manufacturing facility, its five self operated sales showrooms (except for one which is in Coimbatore) and its five franchisees are all based in Chennai. Inability to establish a presence outside Chennai and Coimbatore may impede its growth and business prospects as compared to other established players.
Low Entry Barriers -The wedding card industry by its very nature is highly fragmented with low-product differentiation, resulting in intense competition. Players have weak bargaining power due to low entry barriers and domination by unorganized players. OCL faces competition from Menaka Cards and Lovely Cards in Chennai.
Brand Dilution - Olympic Cards operates under the 'Olympic' brand. By virtue of family arrangement between promoter Mr H. Noor Mohamed and his brother Late H. Salahudeen, the trademark is also used by successors of Late H. Salahudeen, who operate a business similar to Olympic Cards.

Conclusion / Investment Strategy

OCL is asking for a valuation of 18.6-19.9 times its FY12 annualized EPS which we believe is very aggressive for a small player like OCL compared to Archies which operates in a similar industry is trading at 11 times trailing earnings. We recommend investors to Avoid this issue.

Aggressive Valuations - Avoid

Reviewer recommends Avoid to the issue.