CRISIL assigns grade 3/5 to Varahi IPO

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CRISIL Research has assigned a grade 3/5 to the proposed IPO of Varahi, which indicates that the fundamentals of the IPO are average relative to the other listed equity securities in India.

According to the CRISIL, this grade is not an opinion on whether the issue price is appropriate in relation to the issue fundamentals. The grade is not a recommendation to buy, sell or hold the graded instrument, its future market price or suitability for a particular investor.

The report says, "The assigned grade takes into account Varahi's established position in the Indian packaging industry, which is on a sustained growth trajectory thanks to the growth in end-user industries - mainly FMCG and pharmaceuticals. CRISIL Research expects this industry to grow at 13-16% CAGR over FY11- 14. The grade factors in the company's focus on innovation and product development, ensuring cost savings for its clients. The grade also reflects the company's long-standing relationship with its clients such as Dabur, Perfetti Van Melle and Bajaj Corp, which has translated into repeat orders and provides revenue visibility. Promoter's sound technological knowledge has encouraged product innovations, which has helped in creating a strong brand image. Further, the proximity of Varahi's manufacturing units to key clients' operations ensures timely delivery of its products and lowers logistic costs."

"However, the grade is constrained by the highly competitive nature of the packaging industry due to the presence of a large number of unorganised
players and low entry barriers. Hence players have limited bargaining power. However, continuous product innovation helps in strengthening client relationships and may provide better margins. In addition, Varahi's high client concentration (two large clients accounted for ~80% of FY11 revenues) remains a key risk. Further, successful completion of the proposed capacity expansion remains a key monitorable. On the corporate governance front, independent directors have significant experience in the plastics industry but their management oversight needs to be further strengthened. Also, related party transactions remain a key monitorable."

:The company's income grew at a two-year CAGR of 21.9% to Rs 1,086 mn in FY11. The adjusted net profit was Rs 108 mn in FY11 as against Rs 77 mn in FY09. It recorded EPS of Rs 5.4 for FY11. Its net worth as of March 2011 was Rs 547 mn. The company's RoNW was 23.4% in FY09, which declined to 21.7% in FY11."

Disclaimer: A CRISIL IPO Grading is a one-time assessment and reflects CRISIL's current opinion on the fundamentals of the graded equity issue in relation to other listed equity securities in India. A CRISIL IPO Grading is neither an audit of the issuer by CRISIL nor is it a credit rating. Every CRISIL IPO Grading is based on the information provided by the issuer or obtained by CRISIL from sources it considers reliable. CRISIL does not guarantee the completeness or accuracy of the information on which the grading is based. A CRISIL IPO Grading is not a recommendation to buy / sell or hold the graded instrument; it does not comment on the issue price, future market price or suitability for a particular investor. CRISIL is not responsible for any errors and especially states that it has no financial liability whatsoever to the subscribers / users / transmitters / distributors of CRISIL IPO Gradings.

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To read the full report click on the attachment