Tuesday 11 March 2008

IPO Analysis - Sita Shree Food Products

Investors can refrain from subscribing to the initial public offer from Sita Shree Food Products.The risks associated with the company’s new business foray are high and may outweigh the return potential from this offer.

The company, which has been engaged in making wheat products such as atta, rava and sooji, proposes to raise Rs 31.5 crore through this book-built IPO to fund the setting up of new manufacturing facilities for soya oil and deoiled cake (500 tonnes per day) and to expand flour milling capacities (additional 275 tpd). The offer is being made in a price band of Rs 27-30, valuing the company at a stiff 24-27 times its earnings, without considering the equity expansion due to the offer.
Business

Sita Shree Foods makes wheat products which are sold mainly in bulk form. It has managed a steady ramp up in its sales from Rs 23 crore to Rs 82 crore between FY-04 and FY-07.

Operating profit margins in this business, however, have been thin, hovering in the 3 per cent range in recent years and net profits have risen from Rs 16 lakh to Rs 92 lakh over the same period.

The company has in the past been one of the suppliers to Godrej Pillsbury and Unilever and also counts retail chains such as Pantaloon Retail and Reliance Retail among its clients. Going forward, the opportunity for supplying wheat products in bulk or packaged form to retail chains may continue to expand as these players lay a greater thrust on dry groceries and private label sales.

Though the company’s expansion plans for wheat products may come in handy in this respect, margins may continue to be wafer thin, given competition from much larger and unorganised players in the flour milling segment.
Risk factors

The company’s foray into soya oil and soyameal business (used and exported as animal feed) comes at an opportune time, when global demand and prices for soya products are firm. Though good location advantages and the promoter’s experience in commodity trading may translate into procurement advantages, the lack of scale (competitors such as Ruchi Soya and Gujarat Ambuja Exports control capacities of over a million tonnes per annum) and an overseas presence pose risks to the company’s ability to find and sustain a market for its products. Though the company also plans to establish its own brands as well as a marketing network in the domestic market, it will face competition from players with much deeper pockets. The stiff pricing also pegs up the risk element.