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IPO REVIEW

Backward integration will help Kiri Dyes and Chemicals improve margins, but its IPO is fully priced.

Kiri Dyes and Chemicals, a manufacturer of dyes, dye intermediates and chemicals, is planning to integrate backwards by manufacturing basic chemicals---sulphuric acid, oleum and chlorosulphonic acid.

It is also expanding its existing dyes and intermediate capacity. While the 1.8 lakh metric tonnes per annum (mtpa) basic chemicals plant is being built at a cost of Rs 43 crore, the capacity expansion (dyes and intermediate) will cost Rs 2 crore.

To fund the setting up of the new unit, expansion and working capital requirement of Rs 7 crore, the company is planning to raise Rs 47 crore to Rs 56 crore through its IPO at the lower (Rs 125) and the higher end (Rs 150) of the price band, respectively.

The cancellation of value added tax (VAT) refunds on China's dyestuff exports by the Chinese government has increased costs of Chinese manufacturers and made their exports uncompetitive. This has helped domestic players including Kiri Dyes and Chemicals which exports 60 per cent of its 10,800 mtpa of reactive dyes and intermediates, get better realisations for their exports.

Further, to expand its presence in disperse and acid dyes, which Kiri does not manufacture, the company has entered into a JV with the world's largest dyes producer, Zhejiang Longsheng group of China to manufacture dyes with a capacity of 20,000 mtpa.

While the Chinese partner gets a presence outside China, Kiri will be able to scale up quickly with borrowed technology and get access to a customer base.

With 50 large and 900 small dyes and inte mediate manufacturers, Kiri Dyes and Chemicals will have difficult time maintaining margins.

However, the company claims that the decision to build an integrated unit comprising finished products, intermediates and basic chemicals with aniline and naphthalene base will make it the only unit in India to have this product range under one roof.

The new plant, the company says, will help cut sourcing costs by 20 per cent and the double conversion, double absorption technology will help to generate power and save Rs 6-7 crore per year in power bills.

Investment rationale
While the company's sales growth for the period FY 2005-07 has been impressive with a 36 per cent annual growth rate, its annual sales growth over the last five years is just over 10 per cent.

Its operating margins have gone up over the last two years from 8.4 per cent in FY 2006 to 12 per cent in FY07 and further to 16 per cent in first half of FY08. 
 

VOLUME PLAY
Rs crore	FY07	FY08E	FY09E
Sales	133.75	184.00	250.24
Operating Profit	15.59	21.45	37.54
Net Profit	8.63	11.04	25.02
EPS (Rs)	8.60	7.36	16.68
P/E at Rs 150		20.38	8.99
Rs 125		16.98	7.49

At Rs 150, the stock discounts its estimated FY09 earnings of Rs 20 by 9 times, while at the lower end it is available at 7 times, which seems reasonable.

However, given that chemical manufacturers (read commodity stocks) typically enjoy single digit PEs, the IPO is stiffly priced. Only those investors, willing to wait till FY10, when the full benefits of the expansion will accrue, may gain. Slip ups in project execution or oversupply (or lower product prices) in world markets could prove to be a dampener.

Issue opened: March 25
Issue closes: April 2