Manpasand Beverages IPO: It’s a costly gulp :: Business Line

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A manufacturer and seller of fruit drinks, Manpasand Beverages is aiming to raise ₹400 crore from its initial public offering. Manpasand’s sales are mostly in the underpenetrated rural and semi-urban markets. It has increased production in the past three years and thus clocked good growth. It also sells to IRCTC vendors. Operating profit margins are healthy at 15-16 per cent, and with the debt reduction, net profit margins are set to improve. But investors can skip this issue, primarily because its asking price is too high.

This apart, its small product basket and a slowdown in rural demand play spoilsport. The stock is also likely to have a small-cap status post-listing, thus raising the risk profile.

Too pricey

In the price band of ₹290 to ₹320 a share, the issue discounts annualised earnings for 2014-15 by 88 to 90 times on post-issue equity. Manpasand doesn’t have a direct peer in the listed space, as no player is exclusively in the sale of fruit drinks.

The closest comparable is Dabur India, maker of the ‘Real’ juices, a brand that has crossed the ₹1,000-crore mark. Dabur’s FY15 price earnings multiple is 42 times. The BSE FMCG index trades at 40 times.

Manpasand’s revenue, at an annualised FY15 figure of around ₹325 crore, is smaller than that of many listed FMCG companies. The company is also heavily reliant on one product — mango fruit juices, sold under the Mango Sip brand.

The company did add new flavours of fruits under ‘Fruits Up,’ which includes carbonated drinks and energy drink Manpasand ORS, in July last year. This move has been successful, with the two brands quickly making up 7.7 and 5 per cent of revenues, respectively, bringing the dependence on Mango Sip down to 86.7 per cent. It has also begun diversification into bottled water. Even so, the company is heavily dependent on one brand.

Bajaj Corp is another FMCG player heavily reliant on its flagship Almond Drops hair oil, but the brand is a market leader in its category.

Like Dabur India, it trades at a price-earnings multiple of 31 times, lower than Manpasand’s offer valuation.

Near-term pressures

Manpasand does have an advantage in its concentration in the rural, semi-urban and north-eastern regions, which are underpenetrated. But it battles the likes of Parle Agro India, Coca Cola India and Pepsi India which have far greater firepower to push sales and gain market share. Revenue growth may also be capped for the next few quarters. One, poor monsoon can hit rural demand as incomes fall. Two, growth in earlier years came about through a production ramp-up. Revenues surged to ₹241 crore in 2012-13, against the ₹85 crore in the period from December 2010 to March 2012. Growth in 2013-14 was 22 per cent as the effect tapered off.

There is new capacity planned with ₹152 crore of the issue proceeds earmarked for this, but it is set to commence production only in January 2017. The company also has a third plant, besides the two existing ones, but it is yet to commence production.

Revenue boost from higher capacity will thus play out only over the long term. Revenue and growth visibility will depend on capacity ramp-up and conversion into sales.

The capacity expansion can also increase depreciation in the near term, which has already bitten into profits; net profit shrank 9 per cent in 2013-14. Interest outgo, which had also weighed on profits, will however reduce as ₹100 crore of the issue proceeds will be used to repay debt.

Also, keeping a lid on profit margins is input costs trending higher — fruits, especially mango, are the chief input accounting for 60 per cent of sales. Wayward rains have affected mango production this year. Manpasand may not have enough pricing power to hike prices and protect margins.

The remaining issue proceeds will be used to modernise existing plants and set up a new corporate office.