The Hindu Business Line : Southern Online Bio Technologies: Avoid

INVESTORS can give this public-cum-rights offer from Southern Online Bio Technologies Ltd the miss. The public offer is to fund the company's entry into the business of producing biofuel from plant seeds. This is an emerging business area but fraught with risks. This, coupled with its lacklustre performance in its existing ISP (internet service provider) business, fails to inspire confidence in this public offering.

Southern Online proposes to set up a 30 tonnes per day plant near Hyderabad to produce biofuel from jatropha, neem, mahua and pongamia seeds. This biofuel will be sold to consumers for blending with diesel. Ideally, a blend of up to 20 per cent biofuel in diesel is possible with existing engines and with minor modifications biodiesel can be used fully.

Southern Online has arranged for supply of a small part of the required quantity of seeds with a Bangalore-based company that has linkages with growers of such seeds. As a fall back option it has also tied up with a Malaysian company for the supply of vegetable oil for entire quantity of raw material required. The company will produce biofuel based on technology from German company, Lurgi, which has implemented biodiesel projects across the world.

On the marketing side, Southern Online hopes to sell its biodiesel to the Railways and to other consumers such as the Andhra Pradesh State Road Transport Corporation and the Vizag Municipal Corporation. The risks inherent in the business are many. The company's requirement of seeds is large and it is doubtful if the present system of seeds collection can deliver the required quantity of 10,000 tonnes per annum. At best, it would take some time for the company to establish linkages with farmers and convince them to take up cultivation of jatropha plants with the security of a buyback arrangement.

Second, though biodiesel is in the news now as an alternative fuel to expensive diesel, it is still a long way from commercial acceptance. A lot would depend on the cost of production of biodiesel as consumers need to be presented with an attractive option in terms of significantly lower fuel costs. Southern Online's offer document is silent on the expected selling price of biodiesel, which is the most important factor that will determine the project's success. The company's inexperience in manufacturing could be a major handicap given the untested nature of the biofuel business.

Finally, from an investment point of view, the gestation period for returns for a shareholder may be quite long.

Given the rather ordinary performance of the existing ISP business, Southern Online needs to generate highly superior returns from the biodiesel project. Only that can ensure decent returns for shareholders either in terms of dividend or capital appreciation. This is especially so given that the equity base will grow four-fold from the present Rs 5.70 crore to Rs 22.80 crore after the offer.

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