Avoid Decolight Ceramics IPO; steeply priced

Decolight Ceramics, a manufacturer of vitrified ceramic tiles, is open for subscription with an IPO of 80.45 lakh shares of Rs 10 each at a price band of Rs 45-54 per share.

The company plans to raise Rs 43.45 crore through a 100% book building process. The issue closes on May 29.

Anand Rathi report on Decolight Ceramics IPO:

Business analysis

Decolight Ceramics started manufacturing of Vitrified Ceramic Tiles in 2004 with an installed capacity of 3000sq. meters per day which was further enhanced to 6000 sq. meters per day in 2005-06. The Company has doubled its capacity in March 07 to 12000 sq. meters per day. The company’s products are marketed under the brand name of “Granolite.” The company also intends to enter into the business of ACP with a production capacity of which is newly introduced in the Indian markets. With very few players, the company has a good potential to grow this product line.

Key strengths & future growth potential

Distribution Network

The company has a strong distribution network of more than 500 channel partners across the country. With help of strong network the company is able to push all its new and existing products across various regions.

Fuel Efficient Technology

The company has set up a coal gas plant incorporating Chinese technology, ensuring efficient fuel consumption their by reducing the fuel cost. Further the company has also taken trial of pet coke firing system, which will further reduce the cost if implemented.

Quality Assurance

Company is an ISO 9001:2000 & ISO 14001 certified on the basis of which they were able to get a break through in the international markets. The products are sold to Sri Lanka, Malaysia and African Countries.

Cost Minimization

The company intends to reduce the energy cost by setting up four wind turbine generators aggregating to 4.6 MWs. One of the generators is already commissioned in March 07.

Tax Benefits

The profits arising out of the windmill division would be eligible for deduction @ 100% for ten consecutive assessment years under section 80-IA of the Income Tax Act, 1961.

Concerns

• The company has not yet placed orders for 38 % (Rs 149.80 out of Rs 392.50) of the machinery. Any delay in obtaining/installing the machinery may increase the project cost.
• Two of the Independent Directors Mr. Rajendra G. Dhamasana and Mr. Magan G. Sanaria are either Directors/Partners in similar business which may be a threat in the future
• The business of ACP is new for the company where they lack experience and expertise, hence entails high risk.

Valuations

At the price band of Rs 45 - 54, for FY08E, the stock is available at a P/E of 7.8x and8.6x.The stock appears steeply priced as the existing listed companies are available at cheaper valuations. We recommend our investors to ignore the issue.