Apply for JHS Svendgaard IPO for medium term: Keynote

RELATED NEWS Quick look at JHS Svendgaard IPO The best & worst IPO performers of 2006-07 Minar International IPO poll: Experts opinion mixed Gayatri Projects IPO poll: Experts say apply Post IPO CAR will be at 19.5% Vs 9.39% now: Nasser Munjee Nifty BSE | NSE 25/05/12 Are Mutual Funds betting on Nifty?

JHS Svendgaard Laboratories is open for subscription with a public issue of 67,00,000 equity shares of Rs 10 each including promoters contribution of 5,00,000 equity shares of Rs 10 each.

The net issue to the public is 62,00,000 equity shares of Rs 10 each. The issue is being made by 100% book building process and the price band is Rs 49 to Rs 58 per equity share.  The net issue will constitute 49.60% of the fully diluted post issue paid capital of the company.

The issue closes on Wednesday, October 4, 2006.

For the year ended March 31, 2006, JHS Svendgaard posted net profit of Rs 4.03 crore (Rs 40.3 million) on turnover of Rs 36.93 crore (Rs 369.3 million).

The equity shares of the company will be listed on the National Stock Exchange of India and the Bombay Stock Exchange. UTI Bank, Centrum Capital and Bajaj Capital are the book running lead managers to the issue.

The Keynote Capitals report on JHS Svendgaard IPO:

On the basis of our estimates, the IPO valuation works out at 16.8x FY07 and 8.1x FY08 earnings. In our view, investors may consider this issue with a medium term view.

Recommendation - Subscribe with a medium term view

• JHS Svendgaard Laboratories is a producer of various dental and oral care products like toothbrushes, toothpaste, whitening gel and denture cleaning effervescent tablets.
• JHS has ISO 9001 - 2000 certification for production facilities at New Delhi. It has another 100% export oriented unit at Noida special economic zone.
• Strong in-house designing facilities with low turnaround time gives the benefit of immediate response to changing market needs.
• Well diversified portfolio of products with equal mix of domestic sales and exports.
• Backward integration of the manufacturing process will positively impact the bottomline. The proposed Anchor free technology plant in the tax-friendly zone of Himachal Pradesh will lead to benefits like capital investment subsidy, excise duty exemption for 10 years, income tax and sales tax exemption for 5 years.
• As a token of their commitment, promoters are subscribing to half a million shares in the IPO, aggregating to Rs 2.90 crore at the cap price.
• However, JHS will essentially remain a contract manufacturer for domestic and overseas customers. Absence of own brands (except in toothpaste) is a major concern. How effectively is the management able to implement the expansion plan and the marketability of the increased production volumes without sacrificing margins, remains to be seen.
• While we expect topline growth of 67% and 92% in FY07 and FY08 respectively, significant bottomline growth is expected in FY08 only. On the basis of our estimates, the IPO valuation works out at 16.8x FY07 and 8.1x FY08 earnings. In our view, investors may consider this issue with a medium term view.

Investment concerns

• Revenue is dependent on limited number of buyers.
• Current business model is highly dependent on one product (toothbrush).
• Lower level of entry barriers in oral and dental health care industry.
• Absence of own brands, except in toothpaste