The Hindu Business Line : Vimal Oil and Foods: Avoid

This rights-cum-public offer is being made to fund the transition from a solvent extraction company to a branded foods marketer, which may be very difficult.

Investors can refrain from taking exposure to the rights-cum-public offer from Vimal Oil and Foods. Though the offer is priced at a significant discount to the current market price of Rs 40, the stock is unlikely to deliver attractive returns over a one/two-year period, given the uncertainty surrounding the company's earnings prospects. The offer price of Rs 30 discounts the current per share earnings by about four times and diluted earnings by 15 times.

The present offer will expand the equity base nearly four-fold. The company is counting on a successful foray into the branded snack foods market for future earnings; but the transition from a solvent extraction company to a branded foods marketer may be difficult.

Vimal Oil processes and sells refined edible oils under its own brand name. In the current financial year, the company reported annualised net profits of Rs 3.57 crore on sales of Rs 448 crore. This translates into a per share earnings of Rs 2.11 on the post-offer equity base (Rs 7.8 on the pre-offer equity base). The company now proposes to diversify into ready-to-eat snacks such as potato chips and fried and extruded snacks.

The Rs 35.8-crore proceeds of this issue will be used to mainly fund the manufacturing facilities and the initial promotional expenses for this foray. The project relies heavily on this public offer for financing. The market for snack foods, now pegged at about Rs 1,000-1,300 crore, is growing in the low double-digits and is difficult to break into, given the presence of large national players such as PepsiCo and Haldiram's as well as a slew of regional brands which occupy lucrative local niches.

The category also competes with other snacking options such as sweets, biscuits and confectionery.

Being an impulse purchase, success in the snack foods market hinges on consistently adapting the product mix to local tastes, building an extensive logistics and distribution chain and gaining brand recognition through aggressive advertising and promotion.

This requires significant ongoing investments that may require deep pockets; the Rs 8.25-crore set aside in this offer towards promotional expenses may not suffice to sustain investments over the years.

Even established FMCG players such as ITC (Bischips) and Britannia (Snax) have made a few unsuccessful attempts to break into the snack foods market. A relatively small-sized player with no prior experience in FMCG marketing may find the going pretty tough.

Background: The offer size is Rs 35.82 crore, of which Rs 6.83 crore is the rights portion and Rs 29 crore the public portion. The rights offer is being made at Rs 25 per share in the ratio of 3:5, while the public offer is priced at Rs 30. The offer is open from February 21 to March 21.

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