IPO FLEXITUFF INTERNATIONAL

In spite of growth momentum, a robust business model and reasonable pricing, we are hesitant to recommend Flexituffs initial public offering (IPO) to retail investors, as certain promoter group arrangements make us nervous. The proposed utilisation of IPO proceeds also leaves a lot to be desired.

BUSINESS

Promoted and owned by Kalani family in Madhya Pradesh, Flexituff International manufactures flexible intermediate bulk carriers (FIBCs), geo-textile fabrics and BOPP woven bags at its two units in Pithampur and one in Kashipur. It has a subsidiary in Kandla recycling and reprocessing polypropylene.

FIBC is primarily consumed in developed countries. Hence, over 76% of its FY11 revenues come from overseas.

FINANCIALS

The company's financial numbers have jumped substantially in FY11, the latest available before the IPO. The companys revenue jumped 80% to 578 crore and net profit increased nine-fold to 28.9 crore, excluding the impact of adjustments and changes in accounting policies. This was mainly on account of lesser-thanproportionate growth in interest and depreciation burden, even when the tax outgo was down compared to last year. At the end FY11, the company carried debt of 305 crore, which was 1.9 times its equity. In two out of the past four years the company had negative cash flows from operations. Its return on capital employed (RoCE) works out to 13% for FY11. The company has been maintaining its operating profit margins around 13% for the past four years.

KEY CONCERNS

The company is part of a complex structure of companies, limited liability partnerships and trusts that have multiple cross holdings. The DRHP lists 45 entities as group entities. In terms of allocation of IPO proceeds, just 28% will be invested in creating assets. The remaining 72% will be used for working capital and general corporate purposes.

VALUATIONS

Considering the net profit, excluding the impact of extraordinary items and accounting policy changes, the companys per share earnings (EPS) is at 13.3 for FY11 on post-issue equity. The IPO pricing is between 10.9 and 11.7 times the EPS. This is higher than its peer Emmbi Polyarn's P/E at 8.9, but less than that of Jumbo Bags which is at 20.