The Hindu Business Line : Gulshan Sugars and Chemicals: Avoid

Investors can consider giving a go-by to this follow-on public offer by Gulshan Sugars and Chemicals. At an offer price of Rs 40, the price-earnings multiple works out to 15 times the trailing 12-month earnings on an expanded equity base. Though the offer, at 33 per cent discount to the secondary market prices, is attractive, valuations appear stretched for a chemical industry stock. A sustained surge in the prices of limestone, its primary raw material, and coal is likely to reduce margins.

Business

Gulshan Sugars is among the larger manufacturers of calcium carbonate with a 24 per cent share of the domestic market. Though the company makes only one product, its risk profile gets diversified, as calcium carbonate is used in a range of industries, including paper, rubber and plastics, paints, pharmaceuticals, cosmetics and dentifrice. Gulshan Sugars manufactures a range of grades spanning both precipitated and activated calcium carbonate to cater to diverse sectors. Its customer list features large players in the dentifrice and paper sectors.

Though the company faces competition from large unorganised players on the pricing front, its leadership position vis-à-vis other players, scales down this threat. Gulshan Sugars plans to replace a substantial portion of imports by foraying into the ground calcium carbonate space, which caters mainly to the paper industry. With this entry, the company is poised to tap growth opportunities in the paper industry, which is expanding. The growing literate population in the country and the surge in operations in the print media space provide ground for this entry. However, the growth in the offtake from the plastics and dentifrice segments is likely to be modest.

Financials

Gulshan Sugars operates on comfortable margins. Power and fuel costs, along with selling and distribution costs, constitute a fair chunk of its operating cost. In FY-06, despite lower realisations, the company registered an improvement in margins by pruning its operating costs. Though limestone constitutes only 18 per cent of the operating cost, a surge in prices on the back of buoyant demand in the cement industry is a cause for concern.

Offer Details

Gulshan Sugars is offering 66 lakh shares (face value of Rs 8) valued at about Rs 26 crore. Gulshan Sugars plans to deploy a substantial part of the net proceeds to set up a ground calcium carbonate facility with a capacity of 20,000 tonnes and also set up a 3 MW captive generation plant. The offer will be open from November 22 to 28. SREI Capital Markets is the manager to the offer.

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