Binani Cement's issue a reasonable one: Tulsian

Excerpts from Bazaar on CNBC-TV18 Watch the full show » RELATED NEWS We enjoy monopoly in India: MIC Electronics Glory Polyfilms fixes IPO price at Rs 48 Apply for Insecticides IPO but with caution: Experts Binani Cements plans to issue shares on behalf of JP Morgan Nifty BSE | NSE 31/05/12 Are Mutual Funds betting on Nifty? Other Stocks in this news Binani Industries | Glory Chemicals | Monsanto India | Prism Cement | Shree Cements | Syngenta India |

Binani Cement 's issue is a reasonable one, said Investment Advisor S P Tulsian. He suggests a subscribe to the cement firm's issue at the lower end of the price band at Rs 75. Tulsian gives a thumb down to the Insecticides India issue. On the Glory Polyfilms issue, he said it doesn't warrant investment advice to subscribe at Rs 48. He added that one could always go for the MIC Electronics' issue.

Tulsian said, Binani Cement is a reasonable issue. He dosen't feel it's an excellent issue as it does not compared with Shree Cement and Prism Cement  operating fundamentals.

Excerpts from CNBC-TV18's exclusive interview with S P Tulsian:

Q: Would you buy into Binani Cement and at what price?

A: Binani Cement is a reasonable issue. I won't say this is an excellent issue if I compare the operating fundamentals with Shree Cement and Prism Cement. I only advice subscribing at a lower band that is at Rs 75. Only 10% stake is getting diluted by one of the financial investors and probably the momentum play post-listing would catch on.

With the controversy surrounding the cement industry having been settled, the company has huge equity base of about Rs 200 crore. It is expanding its capacity from about 2.3 million tonne to probably 5.3 million tonne. Its profitability or operating performance has to still catch on; they still have to show better profitability.

Considering all those things it's a reasonable issue, I won't say that it's an excellent issue. My advice is only to subscribe at the lower band that is at Rs 75.    

Q: Is the problem more its own financial performance or what's been happening with cement?

A: I do not have any worry or apprehensions in respect to the cement industry per se but the capacity of about 2.5-3 million tonne, which the company will be adding on in the next 12-24 months. The company would probably face a glut situation at that point in time and they may not be able to catch on with better operating performance.

What I am looking for, is more in respect to improvement in their operating performances, which they have to catch on. If you see their H1 performance, for about Rs 350 crore turnover they have a bottomline of about Rs 55 crore. This figure when compared to other cement players operating in this region or with the same capacity level, is much lower.       

Q: Insecticides India is one issue you feel should be avoided, why?

A: The financial performance of Insecticides India has only caught on in the last two years - for FY06 and for nine months ended FY07. In fact, the company tapped the capital market when it drastically or substantially improved its topline and bottomline performance.

This sector is crowded, with very low discounting, if you se the EBITDA margin of multinationals like Monsanto , Syngenta  and Bayer CropScience . They have EBITDA margins of less than 10% while Insecticides India for the nine months of FY07 has shown EBITDA margins of close to 12%. It sometimes creates a doubt whether those kinds of profitability can be sustained.

The small expansion of about Rs 35 crore is fully financed by the equity issue, except for Rs 6 crore coming in from internal accruals. This is a very low discounting industry with a high-working capital margin. I do not find anything attractive as only 25% dilution is taking place. Even in Indian crop protection companies like Excel Crop Care , Nagarjuna Agrichem , etc their performances have all been showing good bottomline EPS of close to Rs 20 or may be Rs 15-25. Still they get discounting of five-six.

You are getting the share of this company now at close to a PE multiple of double digits at close to Rs 11-12. As compared to the other listed peers, this issue is definitely not giving any confidence or excitement to subscribe.   

Q: Don't you like Glory Polyfilms either?

A: Glory Poly is into co-extruded multi-layer polyfilms, which are mainly used for packaging milk and oil. These are low margins, you do not have any expertise and you have a high working capital.

There are umpteen numbers of units operating in the unorganised sector and mainly they cater to the state dairy development board. They incur out of pocket expenses to get orders or payments realised and all those things are very high.

Apart from that, you need to have the art of raw material procurement selling in this high-working capital-intensive industry. At present, the company's capacity is about 3,000 tonne per annum and they are increasing capacity by about 12,000 tonne, adding the printing capacity. Nothing great in all those technologies, they use to excite may be 15-20 years back. I remember Supreme Group was the pioneer and they have started or established themselves by setting up this type of industry. Nowadays no one pays any attention.

Subscribing at Rs 48 with an EPS of less than Rs 4-5, paying for a PE multiple of Rs 10-12, for such a small company, you do not deserve to pay more then 5-6 PE multiple. It doesn't warrant an investment advice for this issue at Rs 48.   

Q: You like MIC Electronics?

A: Yes, it's an innovative project. They are into outdoors advertising and though this is a challenging project, such projects catch on if the promoters are able to penetrate into the market and are able to make their products sell.

They have good margins and this new concept of advertising is catching on. This can definitely replace the venial form of advertising where we used to see  posters etc.

These type of companies get better discounting on the bourses and are liked by the investor. But may be for the first 1-2 years, the company should really establish itself. Even if they are not able to show a good bottomline performance, the market may accepts them nicely because once these kind of projects get penetrated and accepted, it can always give you the bottomline.

I like the concept of the project and think that product acceptability will be there in the time to come. The company should be able to establish and one can always go for this issue.