The Hindu Business Line : Dynemic Products: Avoid

INVESTORS can avoid the initial public offering of Dynemic Products. At Rs 35 (including a premium of Rs 25), the offer price appears stretched. The offer is priced at over two times its last reported book value and at about 20 times its expected earnings for FY-06 on the expanded equity base. Sluggish revenue growth and volatile cash flows from operations are causes of concern.

Dynemic Products makes and sells food colours and dye intermediates. It caters primarily to the processed food and pharmaceutical industries. Dynemic Products derives a chunk of revenue from exports, which contribute about 50 per cent of its revenues. It exports to 40 countries — a large portion of it to the developing world. Its dependence on exports to countries with weak currencies and its exposure to a volatile rupee is a cause for concern.

Revenue growth has been sluggish over the past five years with periods of double-digit growth followed by single-digit growth. As raw materials and power accounts for about 90 per cent of manufacturing costs, its operating margins are susceptible to volatility.

Operating margins have been moving within a 10-15 per cent band over a five-year period. Cash flow from operations turned positive for the first five months of FY-06; this is a notable change when compared to FY-05. A piling up of inventory and a drop in payables had dented its cash flow from operations then and the situation appears to be taking a turn for the better.

Rising disposable incomes of consumers presents an opportunity for growth in the domestic market, as they embrace processed food to a greater extent.

Facing competition from its peers in China and South Korea, the dyestuffs and dye intermediates industry is going through a difficult phase. Margins have dropped substantially in the recent past, caused by a rise in raw material prices on the back of a spurt in the prices of crude oil.

Dynemic Products proposes to utilise the funds raised for expanding its food colours and lake colours facilities; backward integration into producing ethyl acetate, its major raw material; and replacing its boiler plants. The e-projects involve a total outlay of Rs 18.19 crore.

Offer Details: Dynemic Products is offering 44.21 lakh shares at Rs 35 each. Centrum Capital and Bigshare are the manager and registrar respectively to the offer, which opens on January 18 and closes on January 25.