The Hindu Business Line : Shirdi Industries: Avoid

Investors can avoid the initial public offer of Shirdi Industries for now. The offer price of the company — a furniture accessories maker — appears ambitious, given that the wood-based industry has traditionally received a relatively low earnings multiple.

Shirdi Industries makes furniture accessories such as door skin and decorative laminates. It also imports particleboard and medium-density fibre (MDF) boards. The company plans to make these items that are now imported, and also add capacities to the range of manufactured products. The proceeds of the issue will be used to set up capacities of 10 million sq min Uttaranchal, primarily for MDF boards, particleboards and laminates. At the price band of Rs 69-78, Shirdi Industries is likely to list at 19-22 times its expected FY-07 per-share earnings. This is at a substantial premium to peers such as Mangalam Timber or Novopan.

The industry now quotes at a price-earnings multiple in the 6-11 range. Post-listing, the company's market capitalisation would be Rs 195 crore at the higher end of the price band. The small size may subject the stock to high volatility, especially under the present market conditions.

Emerging business

MDF board is made from refined wood fibres and used in furniture, door parts and flooring. MDFs and particleboards can be a cost-effective alternatives to plywood and solid wood as the conversion of wood to finished product is higher in case of the former. Rapid activity in the real-estate space also offers brightened prospects for the furnishing industry. The acceptability of such products in India is currently lower than traditional products such as plywood. Shirdi Industries plans to be an integrated player by supplying the above products and catering to the needs of modular furniture-makers.

The company, which has so far traded these products, does not have prior experience in making MDF boards or particleboards. Companies such as Mangalam Timber, Nuchem and Novopan, though not integrated players, have been in this business and account for more than 35 per cent of the market share in the organised sector.

Further, the wood industry, despite licensing regulations, continues to be plagued by illegal activities, as a result of which the unorganised space continues to thrive. Given that the raw material for MDF and particleboard consists of wood wastes such as sawdust, cuttings and chips, the availability of the same may not be difficult to the unstructured players. The risk of retaining market share, hence, appears riskier than traditional businesses such as plywood.

Up to FY-05, Shirdi Industries' the operating profit margin remained relatively low as a result of revenues from low-margin trading business. In FY-06, however, the jumped 8.8 per cent (from 4 per cent the previous year) as a result of increased manufacturing activity in laminates and door skin. The company may be able to sustain these margins once manufacturing activity forms a chunk of the revenue flows.

Ability to market a low-end product to an end-use segment where brands may have little relevance, poses a challenge for players such as Shirdi Industries. The annualised growth in sales at 17 per cent over the past three years was mainly from trading. A different set of metrics may now determine growth.

The risks related to the business, further dampened by the steep valuation, make Shirdi Industries a less attractive offer.

Offer details: Allianz Securities is the lead manager to the offer, which is open from June 29 to July 05.