Flexituff International is entering the capital market on 29^th September 2011 with a public issue of 67.5 lakh equity shares of Rs.10 each, of which, 45 lakh shares constitute a fresh issue while 22.5 lakh shares is an offer for sale by Clearwater Capital, both priced in the band of Rs. 145-155 per share. At the upper price band, the fresh issue will mop up Rs. 70 crore, while offer for sale will be to the tune of Rs. 35 crore, aggregating to an issue size of Rs. 105 crore.

The issue, constituting 31.09% of the company's post issue paid-up capital, closes on 4^th October for QIB bidders and on 5^th October for retail and HNI bidders. Collins Stewart Inga is the BRLM to the issue, which has previously managed IPO such as Technofab Engineering (Jul 2010), Intrasoft Technologies (Apr 2010), Cords Cable Industries (Feb 2008) which are all ruling anywhere between 25-50% of their respective issue prices.  

Flexituff International manufactures flexible intermediate bulk containers (FIBC), geo-textile fabrics and ground cover, reverse printed BOPP woven bags, special PP bags including leno bags. It has 3 manufacturing facilities in Pithampur (one SEZ and one DTA), Madhya Pradesh and Kashipur, Uttarkhand, and a recycling and processing plant at Kandla for recovering polypropylene and making compounds of plastic. FIBC accounts for over two-thirds of company's annual revenues. 

For FY11, company reported sales of Rs. 578 crore, of which three-fourths were from exports, mainly to Europe and US, and earned EBITDA of Rs. 77 crore (EBITDA margin 13.3%) and net profit of Rs. 34 crore, leading to net margin of 5.8%. In just the previous year i.e. FY10, company's sales was Rs. 321 crore (two-thirds from exports) with EBITDA of Rs. 42 crore (EBITDA margin of 13.2%) and net profit at just Rs. 5.9 crore, leading to net margins of mere 1.8%. Thus, although the EBITDA margins were constant during FY10 and FY11, the net margins expanded mainly due to tax breaks enjoyed by the company.

Company's Kashipur unit started commercial production in FY10, and enjoys 100% income tax deduction for 5 years and 25% deduction thereafter upto FY18. Also the SEZ and DTA at Pithampur enjoy tax benefits, which will expire in 18 months i.e. after FY13. However, from FY12 onwards, due to applicability of minimum alternative tax (MAT) on units in SEZs, company's net margins will see a definite contraction from current levels.

Shareholding pattern of the company requires a mention. Promoter holding is just 32.75% which will decline to a mere 25.97% post-IPO. Selling shareholder, Clearwater Capital, having pre-IPO holding of 26.07%, with effective cost of acquisition of Rs. 102.53 per share, having invested in the company since Jan 2008 and liquidating 50% of its holding currently, will own 10.30% stake in the company, post-IPO. Balance whopping 41.18% stake is currently held by 9 closely held companies (some even part of promoter group but not classified as such in the shareholding pattern on pg 69 of the RHP) and 4 individuals. This significant stake held by 13 entities is suspicious, as 2 individuals (one being the company's Managing Director) bear the Kalani surname (Kalani Industries Pvt. Ltd. is one of the promoters of Flexituff) while atleast 5 of the 9 companies are group companies (as per pg 26 of RHP). Wonder if this important classification was overlooked or is simply deliberate?

An important risk is that 75% of company's consolidated sales are on spot basis, and not bearing long-term contracts, adding to the financial risk. Besides the business being capital and labour intensive, company does not have in place procurement contracts for its raw materials. Also, criminal proceedings (under Indian Penal Code, Prevention of Corruption Act, Food and Drug Administration) against 2 directors, one being company's Managing Director, adds to the discomfort.

Key objects of the issue include expansion of manufacturing facilities at Pithampur for Rs. 19 crore, establishing 811 MT dripper project at Kashipur for Rs. 8 crore and working capital requirement of Rs. 25 crore.

As of 31^st March 2011, company had net worth of Rs. 163 crore, BVPS of Rs. 95 and debt of Rs. 303 crore. For FY11, it had diluted EPS of Rs. 20.17. At upper end of issue price of Rs. 155, company is offering shares at PE multiple of 7.7 times, which is on the higher side. Market cap of Rs. 337 crore on listing (at Rs. 155 per share) and enterprise value of Rs. 600 crore is quite stretched.

Give the issue a miss, based on poor disclosure standards, object of issue, high debt and expensive valuations.