IPO Review & Analysis : C. Mahendra Exports Ltd.



IPO Review : C Mahendra Exports Ltd.(CMEL) turns out to be the last public issue of the decade.  The issue will open on December 31st 2010 and will remain open till January 6th 2011. The price band of the issue has been decided at Rs. 95-110. A minimum bid of 60 shares can be placed, with further bids in multiples of 60 thereafter. Thus, a retail investor can bid for a maximum of 2100-1800 shares. CMEL is expected to raise Rs. 142.5 to 165 crores through the public issue . (Download : CMEL ASBA Application Form)

CMEL, which is an integrated diamond and diamond jewellery player encompassing sourcing of rough diamonds, trading of rough and polished diamonds, processing of diamonds and manufacture of diamond jewellery, will be utilizing the issue proceeds for the following purposes :
  • Setting up of a diamond processing unit at Gujarat Hira Bourse, SEZ, Ichchhapore, Surat.
  • Setting up of a jewellery manufacturing unit at Mumbai.
  • Setting up new retail outlets
  • Investment in overseas subsidiary C. Mahendra BVBA (Belgium)
  • Brand development
CMEL was initially promoted as a partnership firm in the year 1974. Over a period of years, it has established itself as one of the leading exporters of CPDs (Cut and polished diamonds) from India. CMEL caters to the export as well as the domestic markets, with exports accounting for the bulk of its revenues (78% in the FY 2009-10). It now has two 100% EOU manufacturing facilities at Surat and owns a retail brand called “Ciemme”. Its sales and distribution networks are spread across major diamond trading centres of the world like Hong Kong, Chicago, Houston, Los Angeles, New York, Dubai, Antwerp and Bangkok.

C. Mahendra Exports Ltd.(CMEL)Financial Position : CMEL, on a standalone basis has reported a healthy CAGR of 14% over the last five fiscals. The growth was driven primarily because of the rise in CPD business, but from FY 2008-09 onwards it dropped due to recessionary trends in key export markets. Similalrly, the operating margin of the company also dropped significantly in the FY 2008-09, however it managed to gain some ground partially because of increase in volumes and price of polished diamonds. The Net profit Margin, however has always been modest due to high borrowing costs. CMEL is a highly leveraged company with its Debt-Equity ratio of around 5:1. Even on considering the consolidated figures, it comes out to be 2.60, which is much higher when compared to its peers. This gearing effect is clearly visible on the extremely low Net profit Margins. 
Finacial Highlights - CMEL
Another major area of concern about the financial health of C Mahendra Exports Ltd. is its high working capital requirement. Cost of rough diamonds can account for upto 85% of the total product cost and there is almost negligible credit period  available on the purchase of raw diamonds from DTC. Whereas the the work-in-progress inventory tends to be very high because of the sophisticated production process and at the same time the company’s average debtors collection period has also been on the rise due to recession and delay in realization of export bills. During the FY 2007-08 and FY 2008-09, the company had negative cash flows from operations on a consolidated basis. If this trend continues, then it will become extremely difficult for the company to augment its working capital requirements.

Valuation (Pricing of the IPO) :  The weighted average EPS of CMEL based on the restated consolidated financial statements is 6.85. Considering the average industry P/E of 10.50, the market price of the issue comes out to be Rs. 71.93, thus making the valuation of the issue an attractive one. Also the Net Asset Value (NAV) per share of CMEL as on 31-3-2010 is Rs. 87.97 per share, further strengthening the rationale behind the price band of  Rs. 95-110. However, the above figures of valuation are slightly screwed as the auditor has given a qualified opinion with respect to the valuation of inventories (AS 2) and fixed assets ( AS 10) in both the standalone and consolidated financial statements of CMEL, indicating that proper accounting policies for the same have not been followed.

Significant Risk Factors : Apart from the general risk factors related to a diamond jewellery exporting company like global recession, foreign exchange fluctuation, slack in demand and rising prices of rough diamonds, CMEL is also exposed to the execution risk involved in scaling up the retail business where its track record is limited and the market space is full of established players like Gitanjali Gems. Another major area of concern is its dwindling set of financial numbers like negative cash flows, losses to subsidiaries, high gearing (debt-equity ratio), low net profit margins, increasing cost of raw materials and worsening position of receivables.

IPO Grading : ICRA has assigned it an IPO Grade 2, indicating below average fundamentals. ICRA assigns IPO gradings on a scale of IPO Grade 5 to IPO Grade 1, with Grade 5 indicating strong fundamentals and Grade 1, poor fundamentals. This Grade 2 is very well justified by going through the financial as well as the operational details of the company. 

With a business model characterized by high competitive pressures, inherently low value additions and correspondingly modest margins, the road ahead is not going to be smooth. Investors who look at the future only on the basis of the past should stay away from this IPO, but those who can foresee a global recovery and an upward trend in spending on luxury items and jewelleries, can take a calculated risk by going for C Mahendra Export Ltd.’s Public Issue.

UPDATE : 04/01/2011 : C. Mahendra Exports Ltd.'s Public issue has been subscribed by 2.78 times. The Retail portion of the issue has been oversubscribed by 4.82 times and the QIB portion by 1.02 times.

Please feel free to share your thoughts about the upcoming public issue. Your feed back and comments would be highly appreciated.


Disclaimer : All the information and financial numbers published in the above review have been obtained from the DRHP of C. Mahendra Exports Ltd. filed with SEBI. MONEY MATTERS has only reproduced those numbers in a simple manner to assist you in taking better informed investing decisions.

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5 Respones to "IPO Review & Analysis : C. Mahendra Exports Ltd."

Nandan Narula said...

A very Happy New Year to all the readers of MONEY MATTERS. Stay updated, stay informed and keep following MONEY MATTERS

Happy Investing

Nandan Narula
(Founder- MONEY MATTERS)

pramod said...

nice one,.but should be careful od diamond ipo's.
they easily manipulate balance sheets. and all their assets come up in a briefcase.


January 1, 2011 at 9:29 PM
Nandan Narula said...

@ Pramod : Quite right, ICRA has also given it a Grade 2 and CMEL's audit report also has certain qualifications regarding the valuation of its inventory and fixed assets

Anonymous said...

Gangireddy@ Very good one...gives a good glance..Thank you very much for your valuable suggestions...


January 4, 2011 at 6:37 AM
Nandan Narula said...

@ Gangireddy : Thanks, hope it helped you in taking your investment decision

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