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Vishwaraj Sugar Industries Ltd. IPO Note
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Offer Details

Price band

Rs. 55 – 60 Per Equity Share

Offer Open Date

Sep 30, 2019

Offer Close Date

Oct 4, 2019

Lot Size

240 equity shares and multiple thereof

Face value

Rs 10 Per Equity Share

Issue Type

Book Built Issue IPO

Issue Size

1,00,00,000 equity shares (aggregating upto Rs. 60 cr)

Fresh Issue

30,00,000 equity shares (Rs. 16.5 cr – Rs. 18 cr)

Offer for Sale

70,00,000 equity shares (Rs. 38.5 cr – Rs. 42.0 cr)

Book Building

QIBs

10% of the Offer

Non-Institutional

40% of the Offer

Retail

50% of the Offer

Lead Managers

Aryaman Financial Services Limited

Registrar to Issue

Bigshare Services Private Limited

Exchange

BSE, NSE

Capital Structure

Pre Issue Promoter Shareholding

54.22%

Post issue  Promoter Shareholding

31.35%

 

 

 


















Company Profile:

Incorporated in 1995, Karnataka-based Vishwaraj Sugar Industries Limited (VSL) is engaged in manufacturing of sugar and other allied products. The other allied products manufactured by the company are Extra-Neutral Spirits, Vinegar, Rectified Spirits, Indian Made Liquor, Carbon dioxide (CO2), and Compost. It also generates power from sugar byproducts for captive consumption and commercial sale.

Broadly, the business of the company can be divided into five categories, which are Vinegar, Indian Made Liquor (IML), Co-Generation, Distillery, and Sugar. The products of the company such as rectified spirit, ethanol, and extra neutral spirit come in the distillery product segment.

During the production of sugar, bagasse and molasses are produced which are the basic raw materials for power generation and Distillery (Spirit) manufacturing unit, respectively. For electricity generated over and above captive consumption, company has entered into a PPA with electricity supply companies for sale of surplus power.

The company operates from Belgaum District, Karnataka; designated as one of the "High Recovery zones" for sugar production by the Government of India. It operates a single location sugar unit having licensed crushing capacity of 11,000 TCD. During the last financial year, it produced 32,170 tonnes of sugar and manufactured approximately 1,23,060 boxes of IML, 10,779 KL of industrial vinegar, 3156.59 KL of rectified spirit and 969.47 KL of extra-neutral spirit.

Industry Overview:

After posting record sugar production of 32.2mnt in SS18 (+60% YoY; last peak of 28.3mnt in SS15), India is expected to produce another similar quantum in SS19, led by a) higher acreage and yield in UP (growing adoption of new ‘early variety’ sugarcane), but partially offset by Maharashtra (lower yield). Even after assuming 5mnt of exports, India is likely to end with closing stock of 12mnt in Sep’19, almost 6-7 months’ consumption). Moreover, considering the nature of the crop (long duration and sturdy, assured cash flows, adoption of the early variety of sugarcane) and robust profitability, we believe India should mostly have an excess supply scenario, except in case of severe drought or pest attacks.

The government continues to provide support to the industry through various measures including regulating the minimum selling price (MSP) of sugar, soft loans, export subsidies, cane price assistance, higher ethanol pricing and blending mandates. The government in Feb'19 announced a Rs 2 per kg, or 7% increase in the minimum selling price (MSP) of sugar to Rs 31 per kg. However, the mills were seeking more relief because the price was not helping them to pay the mounting farmers' dues. The new season's (October 2018 to September 2019) crop is also estimated at over 30.7 million tonnes. Compared to the government's mandate to the industry to export 5 million tonnes, the season is expected to end with 3.5 million tonnes in exports. Further, ethanol from sugarcane juice/sugar/sugar syrup route has been fixed at Rs 59.48 a litre from Rs 59.19 earlier; which will be applicable during the ethanol supply year from December 1, 2019 to November 30, 2020.

Financial Overview:

 

FY16

FY17

FY18

FY19

Net Sales (excluding excise duty)

335.65

284.02

221.81

286.21

Operating Profit

27.89

45.86

23.53

24.73

OPM (%)

8.3

16.1

10.6

8.6

EBITDA

30.77

46.90

33.18

25.81

EBITDA Margin (%)

9.17

16.51

14.96

9.02

Interest

12.16

24.91

20.85

36.36

PBT

7.28

10.45

-0.86

-23.89

PAT

0.85

6.06

-4.27

-17.62

EPS (in Rs.)

0.25

1.75

-1.23

-5.10

 











(*Rs. In cr)

On consolidated basis

In FY 2019, income from the sugar business formed approximately 76%, Income from the co-generation business formed 7%; Income from the Distillery business formed 4%, whereas, Income from the IML business formed 8% of its total sales.

Company reported losses in FY18 and FY19, mainly due to high sugarcane price and competitive sugar prices. According to management, due to the quota system, it has to carry over a huge inventory of sugar at the end of every year. VSL is carrying an inventory of 5 lakh quintals. In a bid to reduce inventory, the company plans to divert some of the sugar cane juice for producing ethanol and rectified spirit during this crushing season.

While the company’s total income increased 15% to Rs. 308 crore in FY 2019 vs. Rs. 269 crore in FY 2018, it logged a net loss of ~Rs. 18 crore in FY 2019 against loss of ~Rs. 4 crore in FY 2018, due to high finance cost of Rs. 36 crore in FY 2019 vs 21 crore in the previous year.

Objects of the Issue:

The object of the net fresh issue is to raise funds for funding working capital requirement of Rs 15.70 crore and general corporate purpose. The company will not receive any proceeds from the Offer and the entire proceeds from the Offer will go to the Selling Shareholders.

Key Strengths:

1) Wide product range

2) Its diversified but integrated business model provides most of the necessary raw materials in-house for the various business segment products leading to reduced costs and control over the input material.

3) Strategic location of manufacturing unit: VSL has tie-up with several villages in Belgaum District reserved for the supply of sugarcane to its factory. Over the period of time, there has been a considerable increase in the acreage of sugarcane cultivation in these areas. To tap this increase, VSL increased its installed capacity from 5,500 TCD to 8,500 TCD in FY16.

4) Captive Power plant and exportable capacity: VSL has installed a power plant with electricity generation capacity of 14 MW and 22.4 MW (from Bagasse / Coal). It has entered into a PPA for sale of balance MW electricity with 5 different electricity supply companies and has also installed various energy saving devices at its production facilities; which has enabled it to reduce its captive consumption leading to higher availability of exportable power.

5) Strong Technological Capabilities: The Company has installed Distributed Control System (DCS) at its sugarcane milling and cogeneration facilities for precision system management. It also installed a Tetra Packaging machine in FY17 for its IML products; which helps to save considerable bottling cost. Further, the machinery used for manufacture of Vinegar has been imported from China and it uses the latest technology for processing the diluted ethanol into Vinegar.

Key Strategies:

1) Increasing operational efficiency

2) Addition of new IML products

3) The strategy of the company is to augment its fund based working capital capabilities. The Company has invested a portion of its working capital to provide some of its farmers with high quality seeds for better crop quality. Additional working capital will enable the company to offer such high quality seeds on larger quantities and to a large farmer base.

Key Risks & Concerns:

1) The business of the company is seasonal in nature and as a result, its operating results may fluctuate.

2) Business is working capital intensive. If the company fails to generate sufficient cash flows to allow it to make required payments on its debt or fund working capital requirements, there may be an adverse effect on its business.

3) The company derives a significant portion of its revenue from the sugar segment. Any reduction in demand or in the production of this product could impact its business adversely.

4) Substantial portion of its purchases are dependent upon few suppliers. The loss of any one or more of its major suppliers would have a material effect on VSL.

Peer Comparison:

Name of the Company

Face Value

P/E

EPS

Return on Net Worth (%)

Vishwaraj Sugar Industries

10

NA#

(5.10)

(8.33)

Ugar Sugar Works

1

33.08

0.39

8.5

Dwarikesh Sugar

1

4.45

5.05

20.51

Balrampur Chini Mills

1

5.67

24.98

27.40

Dhampur Sugar Mills

10

4.17

38.40

20.51

*P/E ratio based on closing market price as on July 31st, 2019.

# Since the Basic and Diluted EPS for the year ended March 31, 2019 is negative, these figures are not computable.

Source: Company DRHP

Conclusion:

Although company has experienced promoters and strong executive team with wide range of products & has integrated operations with economies of scale but loss incurred by company is major concern. The financial performance of VSL in the last five fiscals has not been encouraging. It has incurred losses in FY15, FY18 and FY19, which are mainly attributable to the seasonal nature of company’s business, fluctuating sugar prices, increasing sugarcane prices and/or to period of low overall sugarcane growth and availability. Due to its presence in a key political agri commodity like sugar, it is a victim of unfavorable sugar industry pricing policy (controlled policy with quota system) of the government. Though with the proposed distillery expansion plan, the company should benefit from the higher ethanol blending with petrol, the level of profitability will depend on the cost of production of ethanol vs the ethanol price fixed by the government.

On valuation front, at higher price band, VSL is demanding an EV/Sales multiple of 1.8x as compared to 0.9x of the peer average. Poor financial data is not in line with asking price. One may thus avoid the IPO.

 

Source: DRHP filings of Vishwaraj Sugar Industries Ltd.

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