Raj Oil Mills (Raj Oil) is an established player in the Indian Edible Oil space, with major presence in Western India.
The company is known for its brands such as Cocoraj (coconut oil), Guinea (groundnut oil and sunflower oil) and Raj.
Raj Oil has set a price band of Rs100-120 a share for its initial public offer (IPO) of 9.5 million fresh shares. The issue would constitute 26.38% of the fully-diluted post-issue paid-up capital of the company.
It proposes to utilize the proceeds for setting up various facilities at Manor in Thane district of Maharashtra.
These include a refinery of 200 TPD, which can process sunflower, soyabean, groundnut, palm, cotton seed oils; a crushing unit of 200 TPD for groundnut and copra; a palm fractionation unit of 100 TPD; and a vanaspati ghee unit of 50 TPD, an ayurvedic and cosmetic unit of 5 TPD and in-house blow-moulding plant for PET bottles.
Raj Oil’s brands are a household name in the western parts of India. The provision of wide range of products, such as mustard oil, sunflower oil, groundnut oil, cottonseed oil, til oil and ayurvedic oil, sets the company apart from the other unorganized players.
The company has varied oils and derivative products in its product basket allowing the customer to choose as per their requirement. Raj Oil has a well established network spread across states catered by Consignee Agents and their distributors.
These agents then distribute the company’s products to the numerous retailers spread across the length and breadth of India. The company, which has a strong retail network, is aiming to spread its area of operations going ahead.
The company clocked strong CAGR of 56.1% and 167.2% in sales and net profit over CY2005-08 respectively, on the back of robust growth in branded sales. Its margin and Return Ratios are also pretty healthy and the best in the industry.
We believe that the company can continue with such a performance as it is also expanding its capacity over the next year.
Going ahead, we expect the company’s CY2010E Revenue to increase to Rs668cr on the back of strong growth in the volumes.
Also on the back of the ongoing backward integration plan, we expect the company to maintain its Margins going ahead.
However, Raj Oils’ IPO is being priced at a ‘considerable’ premium to the other listed player like K S Oils, which are larger in size and also enjoy backward integration benefits. K S Oils also has a pan India presence. Larger size of K S Oils also gives it a better competitive advantage.
Though Raj Oils has the highest margins and return ratios in the industry on account of presence only in retail segment, we believe that going ahead the company will have to enter the bulk and institution sales in order to achieve size.
On the lower and upper end of the IPO price band, the stock would quote at 5.7x and 6.9x its post diluted CY2010E Earnings, which we believe is higher than K S Oils which is currently trading at 6x FY2011E earnings.
The company’s expensive valuation outweighs its good growth prospects and hence, we maintain NEUTRAL recommendation on the IPO.