Anand Rathi neutral on 20 Microns IPO

Anand Rathi Securities has come out with a research report on 20 Microns' IPO. It has given a neutral rating to the issue.

20 Microns will open for subscription on September 8, 2008 with its public issue of 43,50,632 Equity shares of Rs 10. The price band has been fixed at Rs 50-55. The issue will close on September 11, 2008.

Anand Rathi Securities' report on 20 Microns' IPO:

20ML is a multi-product company which helps to protect it from reductions in demand for any one product type.

20ML’s mining resources and plants are strategically located in the states of Rajasthan, Gujarat, and Tamil Nadu. The manufacturing units of the company are well connected with national - highways and railways which helps the company in reaching to its customers economically.

20ML’s implementation of business planning tools, focus on technical support, field coaching and constant evaluation of product knowledge and training has helped in improving effectiveness and field force productivity. Customer segmentation has also helped to sharpen the focus on its key customers.

A demand under the Central Excise Act to the tune of Rs 107.29 million if decided against the company will adversely affect the financial conditions and the business of operations of the company.

Out of the total issue proceeds (at higher end of price band) of Rs 239.28 million, the offer for sale is Rs 147.16 million and thus the company will be receiving only Rs 92.12 million.

20ML faces competition from unorganized sector whose costs are lower due to exemption from excise duty. The players in the unorganized sector change their formulations to absorb some of the cheaper ground material to lower their cost of production and in turn reducing their pricing. Thus 20ML may be forced to reduce the prices of its offerings and services, which may reduce its revenues and margins and/or decrease its market share, which would adversely affect the business operations of the company.

Valuation:-

At the price of Rs50-55, the issue is priced at 13.6x-15x its FY08 EPS of Rs3.68 and at 15.4x-17.0x its FY08 FDEPS of Rs3.2. On comparison with its established peers which are comparatively larger in size, 20ML appears expensive. Taking into account the valuation and considering the risks associated with the investment concerns cited above, We are NEUTRAL to the issue