ASTER SILICATES

Aster Silicates is entering the capital market on 24th June 2010 to raise Rs. 53.1 crores, with a fresh issue of equity shares of Rs.10 each, in a price band of Rs.112 to Rs.118 per share. The company will issue 45 to 47 lakh fresh equity shares, depending on the price discovered via the public issue, which closes on 28th June 2010.

The company, manufacturing sodium silicate primarily used by the FMCG, tyre and pesticides industry, operates two manufacturing units in Gujarat, with a combined capacity of 150 MT of glass per day (MTPD). It operates in a very competitive and fragmented industry in Gujarat.

The objects of the issue include tripling of manufacturing capacity to 450 MTPD, with investment of Rs. 44.3 crores and meeting working capital needs of Rs. 7.5 crores. For FY11, the company has estimated working capital requirement of Rs. 26.5 crores. Rs. 7.5 crores will be met through issue proceeds and balance Rs. 19 crores will be borrowed / arranged by the company, for which no arrangements have yet been finalised.

The company is heavily dependent on very few customers as well as suppliers. For FY10, top 5 customers accounted for over 83% of its turnover, whereas, its purchases were concentrated among just 3 suppliers, which supplied a whopping 97% of the company's total purchases for that year. This only signifies a very low bargaining power in the hands of the company, both as a buyer and seller, which may be a concern post-expansion. Moreover, it does not have any long term supply agreement with its customers.

Coming on to its financial performance, the company reported sales of Rs. 62 crores for FY10 and a PAT of Rs. 4.4 crores. On an equity of Rs. 10.36 crores, FY10 EPS was Rs. 5.1 and networth, as on 31st March 2010, was Rs. 20.3 crores, resulting in a book value per share of Rs. 23.5. Outstanding debt, as on 31st March 2010, was Rs. 14.5 crores. Over the years, its debtors turnover ratio has been falling, from 8.8 in FY08 to 3.6 in FY10, indicating softer credit period given to customers by the company.

At the lower end of the price band at 112, the PE multiple works out to 22 times and PBV 4.8 times. There are no listed companies engaged purely in sodium silicate business, but such chemical companies deserve a PE of not more than 5. To us, the share justifies a price of not more than Rs. 35!

The issue is grossly over-priced and does not deserve an enterprise value (market capital plus debt minus cash) of Rs. 183 crores, post-listing. The issue is a clear avoid.