Verdict: Not sweet!

IPO Snapshot:

Vishwaraj Sugar has entered the primary market on Monday 30^th September 2019, with an initial public offering (IPO) of up to 1 crore equity shares of Rs. 10 each, comprising fresh issue of 30 lakh shares and an offer for sale (OFS) of up to 70 lakh shares, by the promoter and few individual shareholders, both in the price band of Rs. 55 to Rs. 60 per share. Issue, aggregating only Rs. 60 crore, representing 26.6% of the post issue paid-up share capital, and will be allocated in the 50:40:10 ratio among retail, HNI and QIB investors respectively. Issue closes on Friday 4^th October with listing likely on 16^th October.

Objects of Issue and Shareholding:

Fresh issue proceeds of Rs. 18 crore will mainly be used for working capital funding, while OFS of Rs. 42 crore will not flow into the company. Promoter shareholding of 54.22% will contract to 32.83% post IPO.

Company Background:

Vishwaraj Sugar is a Karnataka based integrated sugar mill, with sugarcane crushing capacity of 11,000 TCD, translating into sugar manufacturing capacity of 2.4 lakh tons per annum (based on high recovery of 11% enjoyed in the state), 6.6 lakh tons and 88,000 tons of annual capacity of bagasse and molasses respectively. Thus, like all sugar mills, company has integrated operations of power (co-generation) and distillery, in addition to Indian made foreign liquor (IMFL) and vinegar units, which use by-products of sugar manufacturing process.

Financials:

Despite integrated operations, company reported net losses in 3 of the past 5 financial years. Between FY15 to FY19, revenue remained flat, rather declined 3% from Rs. 345 crore in FY15 to Rs. 307 crore in FY19. EBITDA also dropped marginally to Rs. 25.8 crore in FY19, from Rs. 26.1 crore (FY15). As finance cost swelled, net losses rose to Rs.18 crore in FY19, leading to net EPS of negative Rs. 5.  

On net worth of Rs. 212 crore, company’s total debt stands at Rs. 319 crore, leading to a high debt equity ratio of 1.5:1. While debt is largely to finance working capital, fresh issue portion is not too large, which will keep debt levels augmented.

Valuation:

At Rs. 60 per share, company’s market cap will be Rs. 225 crore, with EV of Rs. 543 crore. Since it is a loss making, PE multiple basis valuation can not be undertaken. Also, peer comparison is not appropriate, as larger sugar producers such as Dwarikesh, Balrampur, Dhampur, Dalmia Bharat and Ugar Sugar are not only bigger in scale but also profitable businesses, with some even cash rich balance sheets, while all are having presence in U.P., which is seen more rewarding Geography to be in.

Conclusion:

Small issue size, poor financial track record of the company and dwindling fortune of the sector (especially non-UP based sugar mills) make the offering un-sweet. Hence, the IPO is best avoided.

Grey Market Premium (GMP) of Vishwaraj Sugar: Grey Market Premium of Vishwaraj Sugar is an unofficial figure, against guidelines of SEBI. We strongly recommend investors against following the grey market premium. To know more about grey market premium and how it operates, read our article on ‘grey market premium’ in Pathshala column.

Disclosure: No Interest.