RDB Rasayans Ltd IPO Review by MLR Securities (Avoid)

Review By MLR Securities Private Ltd on September 22, 2011

Issue Period: 21st Sep - 23rd Sep
Price Band: INR 72-79
Issue Size: INR 32.4-35.6 Cr
Mcap: INR 128-140 Cr
Grading: BWR IPO Grade 2
BRLM: Chartered Capital & Invst ltd
Promoter: Sunder Lal , Vinod & Sheetal Dugar
Listing: BSE

RRL is a manufacturer of Polypropylene (PP) Tape, PP woven sacks, Woven fabrics, Industrial woven fabric, PP woven fabrics and PP woven bags. In 2004, RRL started manufacturing of Flexible Intermediate Bulk Containers (FIBC) or Jumbo Bags with installed capacity of 1,800 MTPA. In 2009 the installed capacity was increased to 6,050 MTPA. The present capacity is 7,000 MTPA (increased from 6,050 MTPA to 7,000 MTPA w.e.f. March 31, 2010). With the present installed capacity, RRL can produce 2 lac Jumbo Bags and 25 lac PP woven sacks per month. Company's clientele includes Haldia Petrochemicals ltd, Tata Chemicals Ltd., Phillips Carbon Black Ltd., Mitsubishi Chemical Corp- PTA, Hitech Carbon etc.

RDB Rasayans Ltd is part of The RDB Group promoted by Mr. Sunder Lal Dugar. The Group is engaged in infrastructure development, cigarettes and tobacco, printing and packaging, containers and bags, automobiles marketing, retail business, production and installation of power transmission lines and logistics.

Mr. Sunder Lal Dugar (56 years) is the Chairman of RDB Group of Industries, RDB Rasayans Ltd. He is the Non-Executive Chairman of EMC Limited. Mr Sunder Lal Dugar is an industrialist with experience of over 30 years in management and administration in various domains that include real estate, energy, tobacco and other industries.

Objects of the Issue

To enhance the manufacturing capacity by 7,450 MTPA by establishing the Unit -II.

The company's topline grew at a CAGR of 12.1% in the last five years to Rs 46 Cr in FY11. While bottomline grew at a CAGR of 4% during the same period to Rs 1.8 Cr. Capacity utilization is quite low at 61% in FY11 and 44% in FY10.
Company exports its products to Europe, Australia and Middle East. Exports contributed to 11% of the revenues of the company in FY11. The company's domestic revenues have shown stable to increasing trends in the last four years, the export revenues declined substantially by about 50% in FY10 due to slowdown in the western economies and consequent decline of trade volumes.
The average EBITDA margin for the period 2008�]2011 was 12.3%. The net profit margin has been fluctuating due to volatility in raw material prices as well as higher depreciation on account of capex incurred during FY09. It posted a net margin of 3.9% in FY11. The company's RoE & RoCE is quite low at 10.6% and 14% respectively. RDB is comfortably leveraged with debt equity level of 0.7:1

Concerns

Low pricing power: Fluctuations in raw material prices and the company's inability to pass or only partially pass
on the hike to the customer could impact profitability
Client Concentration: The company is largely dependent on a few customers, as the top one and top ten customers
constitutes around 15% and 85% of the total income for the year 2010-11. . The loss of one or more significant
clients will have an adverse effect on its revenues.
Outstanding Litigations: There are number of outstanding litigations against other group companies and the
promoter which are under various stages of proceeding in courts or regulatory authorities.

Outstanding Litigations against Promoter - Rs 26.14 Cr
Outstanding Litigations against group companies and associate concerns - Rs 123.61 Cr.

Conclusion / Investment Strategy

Rationale

RRL's market cap is Rs 127-140 Cr on a price band of Rs 72-79. It is asking for a valuation of 58 times FY11 EPS at the upper price band and a P/BV of 11.3 times FY11 book
value of 13.5.

We believe the issue is aggressively priced considering its small scale of operations and weak fundamentals. We recommend investors to avoid this issue.

Reviewer recommends Avoid to the issue.