For a volume-starved bourse, IPOs seem to be a welcome harbinger of some activity. Tomorrow, the third IPO this year - that of Engro Foods (EFL) - promises to bring some much-missed jubilation.
The offer of 27 million shares to the public at a price of Rs25 per share - inclusive of a Rs15 premium - potentially brings Rs675 million to EFL for capex expenditures for the companys growth, and brings investors an opportunity to become shareholders in making and selling products theyve been consuming for long.
As precedent has it, EFL banks on its strong marketing acumen for making this offer a successful one for the public, with marketing expenses worth over 2 percent for the offer. Many would have listened to radio commercials and eyed billboards on busy boulevards touting the possibility of becoming a part-owner of the company.
Theres strong likelihood that many, especially from the retail end, will flock to put the food business in their investment portfolios. After all, Engro, as a whole, has established quite some credibility in the market. They had vouched that the foods division will tread into the greens by 2010 and the companys accounts show theyve stood true to their promise.
So, today, when Engro Foods, currently in growth stages, claims that its projected EPS for 2011 and 2012 will be Rs0.97 and Rs2 respectively, many will believe it will be.
Keeping in mind the burgeoning population of the country, demand for processed foods is expected to stay up, and so is potential growth and overall health of EFL, making the assumed belief in the company more plausible.
As for the debt situation of Engro Foods, the oft-cited ugly duckling in otherwise pretty accounts of Engros financials, the long-term debt to equity ratio is currently less than that of the closest competitor Nestle (see table).
However, a comparison with the long-term debt to equity ratios of other processed food businesses - which, though not close competitors do serve the same target market and are potential close competitors - reveals that EFL should not be too content on this front.
Being a growth company looking at heavy capex expenditures in the near future, the long-term debt holds particular significance as it reflects on a companys finance costs, though EFL claims to maintain this debt-to-equity ratio in the long-run.
Shamoon Tariq of Invisor Securities dispels these fears, saying, "Because Engro Foods is a high revenue company, debt should not be an issue for it. With EFLs revenues netting Rs21 billion in 2010 against long-term liabilities of Rs5 billion, the debt situation appears manageable."
Another chink in the IPOs seemingly shiny armour is the high offer price. At Rs25 per share, Engro Foods PE multiple is expected to be 25.71 and 11.19 in 2011 and 2012 respectively, which is at a considerable discount to that of competitors, particularly Nestle (see table).
However, a glance at the number of floating shares of peer companies makes this a chalk-and-cheese comparison because a lower number of floating shares means a less efficient price discovery.
But, EFLs free float as a percentage of total shares does match with that of competitors, and the industrys PE ratio in the county, in general seems high. In fact, FMCG businesses usually have higher PEs, even in regional peers such as India, by virtue of being high growth companies.
For a high growth company like EFL, with expectations of net margins rising to about 6 percent by 2014 according to the management, the PE ratio should not be too consequential at this point in time when the companys potential is yet to be reached.
That the private placement shares - 48 million sold to companies such as National Bank, AKD, and various international mutual funds - will not be saleable for six months from the date of public subscription may prevent the price from falling for the initial six months of the issue. Once these are allowed to be traded, there would be pressure on the price due to greater supply, and price discovery might improve further.
Overall, stock analysts are positive about the upcoming scrip, indicating the onslaught of some heat in an otherwise tepid stock market. Besides, Engros strong image, considering the company is aiming to sponsor the 2020 Olympics, is likely to take it a long way too.
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ENGRO FOOD PEER COMPARISON
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Long-term debt Trailing Floating Free float
: equity PE shares (mn) (%)
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Engro Foods 49:51 25.77 27 4
Nestle 58:42 60.60 2.3 5
National 25:75 34.94 12 30
Unilver foods 13:87 20.83 0.08 1
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Source: Company accounts & BR Research
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