Paramount Printpackaging is entering the capital market on 20^th April 2011 with a public issue of 1.3 crore equity shares of Rs.10 each, priced between Rs. 32-35 per share, aiming to raise about Rs. 42-46 crore, depending on the price discovered. The issue, constituting 49.04% of post issue paid-up capital of the company, closes on 25^th April.

We have been repeatedly warning our viewers and the investor community at large, against highly-manipulated IPOs being undertaken by promoters in nexus with several intermediaries to trap gullible retail investors. Paramount Printpackaging is another such issue and there is nothing compelling in the company, which calls one to park their money in it, even for momentum gains, if any.

The company has a plant in Navi Mumbai to manufacture 20 lakh duplex board cartons a day, which operates at very low capacity utilization levels of mere 46.29%, 69.79% and 63.97% in FY09, FY10 and 9mFY11 respectively.  Now it plans to set-up a new unit in Gujarat with investment of Rs. 32 crore to manufacture shippers, printed-corrugated and high-end duplex board cartons to supply to its customers which include pharma, auto ancillary, FMGC, food companies.

Since it is a very working capital intensive business, a part of the IPO proceeds (Rs. 4.9 crore) will go to meet additional working capital requirements. To support the increased business, bank borrowings of Rs. 24.5 crore will be sort to in FY12, which will only increase its existing high-interest bearing debt of Rs. 32 crore to Rs. 56.5 crore. Additionally, going forward interest cost will only rise substantially which was already very high at Rs.4.4 crore for 9mFY11.  

The company operates on a very small scale with turnover of just Rs. 47 crore in FY10 and PAT of Rs. 1.7 crore, resulting in EPS of Rs. 1.49. For 9mFY11, turnover was Rs. 44 crore and PAT Rs. 1.7 crore, leading to PAT margin of just 3.9% and EPS of Rs. 1.48 on equity of Rs. 11.70 crore. What is astonishing is that company had incurred net loss of Rs. 2 lakh in FY07 (turnover Rs. 23 crore) and Rs.1.52 lakh in FY09 (turnover Rs. 34 crore) and then suddenly in FY10, it came back in the black, only indicating its preparations for the IPO!

Of the networth of Rs. 22.8 crore, as of 31-12-10, P&L balance is just Rs. 3.6 crore while majority of it is comprised of high equity component of Rs. 11.7 crore and balance Rs. 4.8 crore of share application money and securities premium of Rs. 2.7 crore.

Some other concerns on the company are:

• High dependence on few customers - Top 10 customers contributed 80% of FY10 sales (of which top 3 accounted for 54%) and 73% in FY09
• Poor cash collection - Debtor days of 5.5 months in 9mFY11, having increased from 4 months in FY10
• Corporate governance - company failed to make statutory contributions towards PF, Employees State Insurance and professional tax payments on time in December 2010, for which it is likely to be penalized
• It outsources some job work to group company M/s Parapack, which operates similar line of business as the company, which may be a huge potential conflict of interest going forward

On upper price band of 35, company is seeking a market cap of Rs. 87 crore and EV of Rs. 116 crore which is very aggressive, given its small size, low profit margin and high debt. This translates into a PE multiple of 17.8x as against other listed peers such as Bilcare, TCPL Packaging and Uflex ruling in single-digit PE multiples.

The issue remains a clear avoid. Don't get lured by its low issue price.