Varun Industries is into the business of stainless steel kitchenware and house ware items. It procures these goods directly from various suppliers in India and exports to various overseas countries like American countries, the European Union, Far East and Australia, African countries, and the Middle East. The nature of the business is such that at the end, the net margin is very less and the upside on the margin front is limited. In addition, there is a risk of rise in raw material price. On the positive side it gets a significant benefit in the form of export incentives.
To enhance the margin, Varun Industries recently started manufacturing stainless steel kitchenware and house ware at its new plant at Vasai, Maharashtra and stainless sheet re-rolling mill in Jodhpur, Rajasthan. The company is raising funds of Rs 10 crore for its brand-building exercise to increase its presence in India. And Rs 40.74 crore will be used for working capital requirements.
Financials
Today, 75% of the end use of stainless steel is in the kitchenware and house ware segment. Multi-versatile cookware that functions as bake ware, serve ware, and dinnerware is becoming increasingly popular as the casual entertaining trend continues.
Varun industries maximum revenue comes from stainless steel products. However, the company gets export incentives, which add significantly to the bottom line.
If you look at the latest June 2007 quarter results closely, the net profit of Rs 8.02 crore is due to export incentives of Rs 7.88 crore and wind power sales of Rs 1.26 crore. This shows the company is actually surviving on export incentives and after excluding the export incentives it is incurring net losses in the stainless steel business. Its other business is wind power. It proposes to diversify into iron ore mining and oil and natural gas.
The new manufacturing plant could help the company to improve margins. The total income for the June 2007 quarter is Rs 307.15 crore.
In the FY2006-07 the total income, operating profit and net profit was Rs 740.03 crore, Rs 39.33 crore, and Rs 19.58 crore respectively.
Valuation
The company is raising Rs 54 crore from this public issue. From this, promoters’ contribution is Rs 14.58 crore. From the valuation front, the post issue annualised fully diluted earning per share comes at Rs 14.52.
At a fixed price band the P/E is 4.13(x). The company?s main concern is high raw material cost at 91% of the total cost.
The other concerns are higher debt equity ratio of 3.42 and increasing debtors to sales ratio and currency risk cannot be ignored.
