NCML Industries - IPO: No :: Business Line

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The initial public offer (IPO) of NCML Industries, which refines edible oils, can be skipped. Positives including good sales growth and reasonable valuations are offset by an unattractive, inherently low-margin industry rife with competition.

The promoters will be offloading stake in this IPO; the entire 60 lakh shares on offer (constituting 25.4 per cent of the post-issue capital) are for this purpose and no fresh money will flow into the company.

In the price band of ₹100-120, the offer discounts the company’s 2013-14 earnings by a mere 4.3 to 5.1 times. This valuation is far below those of peers such as Ruchi Soya, while being on a par with those such as JVL Agro.

The edible oils business is marked by low profit margins, a fragmented and vast production base, and lack of pricing power. NCML is likely to be a small-cap stock, post-listing, making it a risky bet.

Cluttered market

NCML Industries was primarily trading in edible oils before moving into their manufacture in fiscal 2012.

Its activities encompass trading in and refining of palm, soy, mustard, sunflower, cottonseed and rapeseed oils, which are sold both retail and wholesale. By-products such as fatty acids and soap stock are sold to other companies.

NCML does have a clutch of consumer brands in refined oils, but this is largely restricted to a few States in the northern region. Its wholesale business is also geared towards this zone.

The regional edible oil retail markets are choc-a-bloc with various brands and players. It also curbs companies’ pricing power.

NCML started out with a capacity of 350 tonnes a day in 2012 and pushed this up to 600 tonnes a day by fiscal 2014.

This boosted growth — revenue from manufacture of edible oil has leaped 63 per cent in 2013-14 over the previous year — but the company is now operating at around 90 per cent capacity.

With no concrete expansion plans in the near future, growth is likely to be slower.

It plans to branch out into oleochemicals for industrial applications, but these are still at a nascent stage. Also, while NCML has the ability to process many edible oils and switch between them with almost no down time, it still depends largely on palm oil. This oil forms about 75 per cent of revenue from both trading and manufacturing activities. A global supply glut in palm oil has sent prices southward for the past year and they are set to remain subdued.

This may limit the pace of growth in the near term as well since much of NCML’s earlier growth came from capacity expansion.

Low margins

Over the past three years, NCML’s revenue has grown at a compounded annual rate of 39 per cent to ₹2,749 crore. This strong growth is attributable to the move into manufacture of edible oils. Net profit for the same period grew at a compounded annual rate of 59 per cent.

Crude palm and soy oils are largely imported due to lack of domestic supply, unlike other oilseeds.

Exchange rate fluctuations can also hurt margins, and long-term contracts are usually not entered into.

Vegetable oil prices tend to be volatile, linked to production and consumption patterns, and subject to vagaries of the weather. As a proportion of sales, raw material cost for NCML stood at 91-93 per cent in the past two years. Operating profit margin is low at 4 per cent, though it is up slightly from the 3 per cent in 2011-12. Net profit margin has been 2 per cent in the past two years.

The issue opens on December 29 and is scheduled to close on January 2. Corporate Strategic Allianz is the lead manager.