The Hindu Business Line : Usher Agro: Avoid

Investors can avoid the initial public offer of Usher Agro, which has been in the business of rice processing for a decade. No doubt, the outlook is bright for rice millers as prices firm up both in the export and domestic markets.

Investors are, however, likely to find more compelling options in the secondary market from players such as KRBL or Satnam Overseas, which are present at the higher end of the food processing chain and are available at more attractive valuations, given their larger scale of operations.

The Rs 550- crore Satnam Overseas, for instance, has a strong branded presence in the export market with its "Kohinoor" brand of Basmati Rice. It has also met with reasonable success with its ready-to-eat segment in the domestic market. The stock trades at 6 times its likely FY 07 earnings per share.

At the issue price, Usher Agro commands a market capitalisation of a mere Rs 27 crore. As a small-cap stock, it is likely to be subject to more volatility.

The lead manager is, however, offering a "safety net" for six months, whereby it will buy back up to 800 shares from eligible allottees at the issue price, in the event of the market price falling below the offer price.

Long-term investors can, nevertheless, give the offer a miss, as there are likely to be other options in the primary market.

Business

The Rs 33-crore Usher Agro produces non-basmati rice and operates in the domestic market alone. The offer proceeds will be used to fund the modernisation of its rice mill at Mathura, Uttar Pradesh, and the setting up of a 1 MW co-generation plant using rice husk, a by-product of the milling process.

A major part of the offer will also fund the company's foray into the wheat segment.

A 250 tonne-per-day wheat roller flour-mill is to be set up at Mathura, which will produce atta, suji, bran and maida.

The projects are already underway. The wheat mill is expected to be operational this month, while the modernisation of the rice mill is likely to be completed by October.

The co-gen plant will be operational by January. The modernisation of the rice mill and the new captive power plant are likely to improve operational efficiencies and lower power costs.

Looking at exports

Usher Agro is also looking at the export market for opportunities. Prospects are bright on the export market even for the non-basmati segment, with the world rice trade on the rise.

Competition is, however, likely to be stiff and may exert pressure on a small company such as Usher Agro. The company hopes to capitalise on the growing demand for bread, bakery, biscuits and so on, which has pushed up the demand for wheat.

Being a new player in a fragmented industry, it will be a challenge to make a significant breakthrough in the industry. It is also entering the market at a relatively difficult period for wheat.

A global shortage of wheat production has hardened prices; India, the second largest consumer of wheat, is likely to be the largest importer this year. With an unstable pricing situation, the wheat business may take longer-than-anticipated to contribute to profits.

Offer details: The offer will raise Rs 18 crore, of which the promoters' contribution amounts to Rs 4.8 crore.

The promoters' stake, post-offer, will be 37 per cent. The offer opens on September 5 and closes on September 11. The lead manager is IDBI Capital.

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