Investors can give a miss to edible oil company NCML Industries' IPO

ET INTELLIGENCE GROUP: The Street is ringing in the New Year with an IPO that investors could do well to avoid. Edible oil company NCML Industries is coming out with an offer for sale of over Rs 60 crore in which strategic investors are selling 25% of the company’s equity. The Delhi-headquartered company sells its brands in northern states and has capacities to refine 600 tonnes per day of crude edible oil. The promoters hold 47% shares.

From being a trading outfit, the company is transforming itself into a branded player. Half of its revenues currently accrue from branded products. (The margin profile of the company is that of a trading company. For a top line ofRs 2767.3 crore, the net profit is Rs 55 crore in FY14 operating profit margin is 5%.) The company has a net debt of Rs 280 crore, negative cash flows for the past three financial years, elongating credit cycles and deteriorating returns on capital employed. The outstanding receivables at the end of FY14 constituted one-third of the annual revenues.

The debt pile is leading to a high interest outgo for the company that is eating into its bottom line. For the quarter ended June 2014, the company paid interest of Rs 8.5 crore, higher than its net profit ofRs 6.6 crore. The company has not paid any dividend in the past.

If there‘s a saving grace, it’s cheap valuation. The offer has valued the NCML stock at 4.3 times the FY14 earnings of the company based on the lower price band of Rs 100. This is significantly lower than the average industry price to earnings multiple of 16.

However, investors have over half-a-dozen listed companies to choose from in the solvent extraction industry. As seen in these cases, it is an uphill task for trading companies to change their business model to that of a fast moving consumer goods ( FMCG) company.

Companies like Ruchi Soya, JVL Agro and Sanwaria Agro continue to earn margins befitting a trading company despite having brands with larger regional footprint. Besides, there are clear headwinds for this import-dependent sector like dropping crude oil prices pushing down prices of the edible oil and currency depreciation adversely impacting the importers.