Invest cautiously in NCML OFS issue of 60 lakh shares

NCML Industries Ltd is offering a 25.48% stake to the public through an offer for sale, or OFS, of 60 lakh shares of Rs 10 face value. The issue opens on December 29 and closes on January 2. The offer price is Rs 100-120 per share.

Through this the company is giving an exit route to three strategic investors which hold a 52.60% stake in it. These investors will hold a 27.12% stake after the issue. The promoters and promoter groups will continue to hold 47.40% in the company. As this is an OFS, no fresh shares are being issued, and the proceeds will not be used for future expansion.

Here is our brief take on the issue.

BUSINESS

NCML is an edible oil refining and trading company. Though incorporated in 1996, it was engaged in trading and packaging of edible oil since 1966 as a partnership firm.

Till 2003-04, the company used to trade and package oils procured only from domestic markets. In 2003-04, it started importing edible and non-edible oils under free trade agreements from countries such as Sri Lanka, Malaysia, Indonesia, Thailand and the UAE.

In 2011-12, it entered into refining of crude edible oil by setting up its only refining unit in Hapur, UP. Initially, the unit's installed capacity was 350 tonnes per day (TPD). In the third quarter of 2013-14, it added 250 TDP. The plant is running at 100% capacity.

The company sells edible oils under own brands - MAANIK (Refined Soya-bean & Refined Cottonseed), MAANIK Gold (Refined Soya-bean Premium Quality), SHAN (Refined Palm Oil), MOTI (Mustard Pakki Dhani) and PEARL (Mustard Kacchi Dhani). Its products are sold in north and central India-UP, Punjab, Haryana, Uttarakhand, Himachal Pradesh, Rajasthan, J&K, MP and Chhattisgarh.

The company is also into wind power generation. It set up its first windmill with a capacity of 600 KW at Palladum village of Kalipalium district, Tamil Nadu, in 2007-08. It set up another plant with a capacity of 2 MW in the same state the next year. Its combined capacity is 6.6 MW. It has a power purchase agreement with the Tamil Nadu State Electricity Board.

FINANCES

The company posted a turnover of Rs 2,767 crore in 2013-14, 39% more than in 2012-13. Sales growth has been 54% a year over the past five years.

In 2013-14, around 40% sales came from refining and the rest from trading. "With higher capacity addition of 250 TPD, we expect refining to account for 50% of our turnover," Manish Jain, managing director, NCML, told Money Today.

Being a working capital-intensive business, profit (both before and after tax) margins are very low. Its profit before tax (PBT) in 2013-14 was Rs 91.38 crore, a 37% increase over the previous year.  The profit after tax (PAT) was Rs 55.23 crore, an increase of 22% over the previous year's figure of Rs 45.28 crore. Profit growth has been 55% a year in the last four years.

PBT and PAT margins were 3.3% and 1.9%, respectively, in 2013-14. When compared to peers-Ruchi Soya (0.2% & 0.05%), KSE (2.9% & 1.9) and Vimal Oils (1.2% & 0.75%)-the numbers look healthy. Agro Tech Foods (7.6% & 5.6%) scores over most in the sector.

It had a debt of Rs 320 crore (both short and long term) at the end of 2013-14 as against Rs 197 crore in 2012-13. The company's debt-to-equity ratio was one at the end of 2013-14 and at 0.76 a year ago.

Over the past five years, the company has given over 17% return on equity. This is not only better than some of its listed peers (Agro tech, Gujarat Ambuja Export and Ruchi Soya) but also more consistent.

VALUATIONS

Based on the price band of Rs 100-120 and March 31 earnings per share of Rs 23.40, the issue has been valued at 4.3-5.2 times earnings, compared to the industry price-to-earnings ratio of 15. The issue has been priced below the company's book value, which is Rs 133.5 based on the 2013-14 balance sheet.

The cheaper pricing could be a deliberate strategy to attract investors.

OUR TAKE

Given the fact that India has been a major edible oil importer (it imports 40% consumption requirement) with per capita oil consumption (11 kg per annum) far below the world average of 20 kg, edible oil refiners and importers still have enough scope for growth.

However, NCML is just another name in the already long list of edible oil and solvent extraction companies. Therefore, it may find getting into new geographies a little tough. The company's presence is mainly in North and North-West and a large part of the business comes from UP and Uttarakhand.

Its limited geographical presence and low brand recognition are key concerns in terms of future revenue growth. Besides, it has only one refining unit, which is already running on full capacity.

Though the company has shown healthy revenue growth over the past five years, the fact that it has generated negative cash flow in the last two years raises some doubt about its short- to medium-term finances.

We have to see if capacity addition in the third quarter of the previous financial year helps it post healthy revenue growth and improve profit margins. For now, retail investors can give the issue a miss.