The Hindu Business Line : Sakuma Exports: Avoid

INVESTORS can avoid subscribing to the initial public offer from Sakuma Exports. The structuring of the offermay leave scope for gains at a later date, on the conversion of warrants.

But the stock is not a desirable addition to the portfolio. Being a relatively small player in the trading business, the company's earnings are likely to be volatile and stock price trends are difficult to predict.

Viewed on a standalone basis, the price demanded on equity shares is stiff. Sakuma Exports has been exporting agri-commodities such as lentils, onions, groundnut, peanut in shell, soyabean and castorseed meal since 2000. It has managed to steadily ramp-up revenues over the past five years and now claims to supply to a diversified basket of 75 clients.

The company's scale of operations is still small. It reported net sales of Rs 80 crore in the five-month period ended August 2005, with net profits of Rs 1.66 crore, despite a sharp improvement in both parameters this year. Even if annualised, this translates into per share earnings of Rs 4.2 on the pre-offer equity and Rs 2.5 on post-offer equity (before conversion).

At Rs 50, the asking price for the offer discounts the company's FY 06 earnings by about 12 times, onthe pre-offer equity. This appears stiff, as even leading players in the business, such as Adani Exports, enjoy a price-earnings multiple of about 11-12 times.

The predictability of the company's earnings is low, given its varying product mix. Export opportunities are no doubt opening up in several agri-commodities such as sugar and horticultural products. However, trading in them is subject to the vagaries of global prices and seasonal and climactic factors influencing demand and supply. This could infuse volatility into the already wafer-thin margins.

While business prospects are uncertain, the structuring of the offer appears a sweetener. Sakuma is offering two detachable warrants with each preference share that would be convertible into two equity shares within 18 months of the allotment.

Given the company's risk profile, investors would probably expect a return of 10 per cent from the preference shares. Based on this assumption, the effective price that the investor is now shelling out for the two detachable warrants works out to roughly Rs 10 per warrant.

If the stock manages to list at, say, Rs 25 and sustains this price over the next 18 months, warrant holders may get the opportunity to subscribe to equity shares at about Rs 19 per share (75 per cent of Rs 25).

There could also be an opportunity to earn a tax shelter on the transaction. However, subscribing to the offer on this premise is risky, as considerable uncertainty is attached to the earnings and stock price trends.

The offer: Sakuma Exports is offering equity shares at Rs 50 each, bundled with 5 per cent cumulative redeemable preference shares of Rs 100 each. Each preference share comes with two detachable warrants that gives you the right to subscribe to two equity shares at 75 per cent of their market price.

s0The price and timing for this conversion will be determined by the company's Board. The bulk of the offer proceeds will go to finance long-term working-capital requirements and meet "general corporate purposes".