The Hindu Business Line : Blue Bird India: Avoid

The long gestation period of the proposed project and the strain on resources due to increasing working capital requirements are causes for concern.

AN AC NIELSEN-ORG MARG study says the notebook market is likely to grow at a compound annual growth of 13 per cent through 2011. — K. K Mustafah

Investors can avoid the initial public offer of Blue Bird India (BBIL). At the upper end of the price band, the offer values the company at about 12 times its annualised FY-07 per-share earnings, on a fully expanded equity base. This is in line with valuations commanded by Navneet Publications. The latter, while smaller than BBIL in terms of revenues, enjoys better margins due to its publication business and offers a superior exposure to this market segment.

BBIL manufactures notebooks and has a presence in western India. Close to 90 per cent of its Rs 400-crore revenue is derived from the sale of notebooks. The company also undertakes commercial printing and recently entered the publication business.

Performance and prospects

BBIL's performance in recent years has been encouraging. Revenues recorded an annualised growth rate of 65 per cent between FY-02 and FY-06. Profits have grown at a scorching pace, jumping fifty-fold during this period; this has been on a low base though. Technology improvements helped operating margins expand from about four per cent to about 13 per cent over this period. Growth in recent quarters appears to have been more sedate, with margins settling at about 13 per cent.

Growing literacy rates offers a steady market for BBIL, which has prompted it to expand its presence beyond Maharashtra. According to an AC Nielsen-ORG Marg study, the notebook market is likely to grow at a compound annual growth of 13 per cent through 2011. This is likely to ensure that BBIL sustains a double-digit revenue growth. A more aggressive push to increase the share of commercial printing and publication in overall revenues could prevent margins from stagnating at these levels. Concerns, however, stem from the long gestation period of the proposed project and the resource crunch that the company could face if the offer is subscribed only at the lower end of the price band.

Expansion plans

BBIL is to invest Rs 70 crore towards expanding its unit in Pune and setting up a new facility in South India. The project will expand its notebooks capacity by 50 per cent and double its printing capacity.

It also intends repaying long-term debt worth Rs 20 crore and augment working capital requirements of Rs 30 crore. With the help of its pre-IPO placement and the current offer, Blue Bird should be able to cover about Rs 100 crore of its requirements. The rest is likely to be met through internal accruals.

However, BBIL's cash flow situation has only now begun to show signs of improvement. The business is working capital intensive and operating cash flows turned positive only in FY-06. Using its internal accruals to meet the balance Rs 30 crore is likely to impose a strain on its resources.

Moreover, the new capacities will go on stream only in the fourth quarter of FY-08. In the medium term, therefore, there could be pressure on earnings growth.

Offer details: Eighty-seven lakh shares are on offer. The price band is Rs 90-105. At the upper end of the price band, Blue Bird will raise Rs 90 crore from the public. The promoter holding post-offer will be 52.6 per cent. The offer closes on November 22. The lead manager is DSP Merrill Lynch.

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