IPO - Varun Industries - Apply for Listing gains

There has been lot of Buzz currently going on around this IPO. Brokerage firms like K R Choksey, Prabhudas Liladher, SP Tulasian and many more are giving a buy call to this IPO.

Respecting all the leading brokerages/Individual calls here is a non-biased review of this company to protect small investors interest.

Seeing all the Apply calls I had a look at the financial statements of Varun Industries. OK now Is it a good company for Investment? No. Not at all until we have a glimpse of their coming few quarters results.

So why am I wasting time writing this note?. The company Issue price seems to have a margin of discount on an expanded equity base. Even though risky there seems to be a potential of around 12-15% return on listing.

Now About the company

Varun Industries is one of the leading manufacturer and exporter of stainless steel, kitchenware, and house ware items. Currently 97.27% of it's income comes from exports. Oh exports, the current Buzz word for Indian companies.

Then why not a long term Investment?

The company operates in a pretty thin margin of 3 to 4%. The prices of raw material, Stainless Steel sheet which is the major input for varun Industries is seen shooting up in the recent past. This if goes up further can even more hamper the companies Operating margin.
The company receives it's major revenue in US Dollars and the recent appreciation of rupee can adversely effect it's Operating margin.

The companies current short term debt stands at around 33.6 crores which is more than 3 times it's current reserves of 9.6 crores. Even the Cash flow of the company does not look attractive to me.

Now on it's valuation front

At the current Issue price of Rs. 60/- the stock trades at around 6.77 times it's FY07 EPS of 8.85 after taking into consideration it's expanded equity base. Based on the first 4 months FY08 results the company saw a increase in net profit growth of around 18%. The company may end up with a EPS of 10 in FY08, expecting it performance to be the same as first 4 months. With the current valuation the company can provide a listing gain of around 12 to 15%.

My advise is to exit the stock on listing and wait for it's coming few quarters to take a Buy call on this stock.

Disclaimer: Please do your analysis before taking a call on this stock. The listing gains may vary depending on the volatility of the market and also the stock can list below it's Issue price.