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Aarati Krishnan

RISK-AVERSE investors can avoid investing in the offer for sale by Vishal Exports Overseas, given the high business risks and volatile earnings that characterise the export-import trading business.

Through this offer for sale, the company's promoters are seeking to offload 25 per cent of their stake in the company to the public shareholders at Rs 45 per share (face value Rs 5). The offer price translates into a price-earnings multiple of about four times the company's annual earnings.

The company derives its revenues from import and export trading in a range of commodities ranging from soyabean, precious metals and chemicals to readymade garments and has a "star trading house" status.

The company has managed a steady ramp-up in its trading revenues over the past five years, from Rs 836 crore in 1998-99 to Rs 1,412 crore in 2002-03.

Profit performance has been less consistent, with profits climbing in four of the past five years, but rising from Rs 12.6 crore in 1998-99 to Rs 23.6 crore in 2002-03. This growth has continued into the first seven months of 2003-04.

Net profit margins have swung between 1.5 and 2 per cent over these years. These margins are in line with those of other listed export trading houses. As the bulk of the company's borrowings are short term in nature, its interest coverage ratio is also quite low, with operating profits covering financial charges by just three times.

Volatile profit performance and thin margins are both characteristics of the business that the company is engaged in. The commodity imports and exports business can expose profit margins to quite a bit of volatility, given that profits would be subject to both commodity price cycles and exchange rate fluctuations.

In this case, the risks are enhanced by the fact that the composition of the company's trading revenues have been in flux, with the proportion between import and export revenues swinging from year to year.

The basket of products in which the company trades is also subject to change, and depends on the availability of trading opportunities in a particular period. The company does not have any specific long-term trading relationship with its suppliers or buyers. It also appears to be fairly heavily dependent on its key clients.

While the top three buyers accounted for about 40 per cent of its revenues, the top three suppliers accounted for nearly half of the company's sales in 2002-03. This certainly pegs up the risk profile of the business.

However, one aspect of this offer that may appeal to investors who are not averse to risk is the offer price. At Rs 45, the offer price for Vishal Exports Overseas discounts its weighted average earnings by just four times. After a sharp surge in their market prices over the past year, the price-earnings multiples for other listed commodity trading houses such as Adani Exports and Satnam Overseas now hover at about 8-10 times their trailing earnings.

Even assuming that Vishal Exports would command a much lower multiple than these stocks, the valuation of four times may leave some room for upside. However, those who invest in the stock should keep in mind the substantial downside risk that could arise from the volatility in earnings.

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