The Hindu Business Line : Bluplast Industries: Avoid

Investors can give the initial public offer by Bluplast Industries a go-by as the valuation appears stretched. At Rs 32, the company is offering shares at about 36 times its FY-06 earnings on an expanded equity base.

Listing gains would be difficult in a volatile market, given the low profile of the offer. Bluplast Industries plans to increase its injection-moulding capacity by 67 per cent to 9,000 tonnes.

The company is also to foray into the untapped plastic wood composite profile business by setting up a 4,900-tonne facility in Daman.

Existing business

Bluplast Industries, among the larger players in the thermoware business, faces competition from such brands as Milton and Cello, which have a stronger recall in the market. The injection-moulded containers it makes completes its kitchenware portfolio.

The highly dispersed nature of the plastic processing industry and the negligible entry barriers have kept the industry margins low. The company faces competition from regional and small players in the container segment.

Bluplast Industries scores low on brand recall which is a significant qualitative factor. Establishing a strong brand recall appears to be difficult as Bluplast Industries already operates on thin margins. Piling up of inventories and accretion to debtors have resulted in negative cash flows from operations over a two-year period.

PVC wood composite business

Bluplast Industries is, perhaps, among the first to set up a PVC wood composite profile facility in India. PVC wood composite profiles serve as replacements for these products as they blend the characteristics of wood and plastic furniture.

Bluplast Industries has entered into a technical tie up with Tung Tai Machine Work of Taiwan, which would also supply machinery for the project.

Although Bluplast Industries would have the first-mover advantage in this business, cash erosion in the kitchenware business may not allow it to leverage all opportunities.

Anyway, the opportunities may not be great, given the tempered growth in the plywood industry.

Risks

The volatile nature of cash flows and the low operating margins are dampeners to the offer.

Key risks also include the management's ability to deal with projects of such a size as the fixed asset base is likely to rise five-fold.

Offer details

Bluplast Industries is offering 110 lakh shares to the general public and its employees at a fixed price. Post-issue the promoters would hold a 41 per cent stake in the company.

Through this offer, the company plans to raise about Rs 35 crore. Bluplast Industries proposes to use about half the proceeds to set up a PVC wood composite profile facility at Daman and a quarter to meet the enhanced working-capital requirements.

The lead manager to the offer is Allianz Securities and the registrar is Bigshare Capital Services. The offer opens on June 5 and closes on June 9.

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