The Hindu Business Line : Oriental Trimex: Avoid

Investors can give the initial public offer of Oriental Trimex a miss. The company's business of processing marble and trading in decorative stones is fraught with risks that outweigh the growth prospects offered by the realty boom. Presence of larger established companies and a highly unorganised market with diverse players could impede the company's effort to gain market share for its expanded capacity.

In the price band of Rs 40-48, the offer is priced at seven-eight times its annualised earnings for FY-07 on the existing equity base. If the expansion goes on stream by FY-08, as suggested, the price-earnings multiple is likely to be about nine-11 times on the expanded equity. The economies of the scaling up are likely to show up fully from FY-09. Nevertheless, the valuations appear to be at a premium to peers such as Aro Granite and Madhav Marbles and Granite, which are trading at 4.6 and 5.5 times their respective annualised earnings for FY-07. Only a larger player (in terms of market share), such as Pokarna, commands a double-digit valuation. Oriental Trimex's market capitalisation at the offer price works out to Rs 62-74 crore. A small market cap may also mean high stock volatility.

Business plans and risks

Oriental Trimex is a New Delhi-based company engaged in the business of cutting, polishing and processing of imported and indigenous marbles, and trading in decorative stones including granite. The company plans to raise Rs 40-48 crore to fund capacity expansion. It plans to double its existing marble processing capacity to 25,200 tonnes per annum and set up similar units with capacities of 12,600 tonnes per annum each in Bangalore and Kolkata.

The expansion represents a four-fold ramp up of capacity within one year. While the demand for the product is likely to be driven by the real-estate boom in the short term, the ambitious plans carry execution risks and could expose the company to the risks of excess capacity if the housing segment growth moderates.

The company also plans to set up a granite processing facility in Orissa. It has acquired two quarries for sourcing for this unit; 50 per cent of its output is to be exported. While there are a number of domestic branded players in the granite business, the company may be able to export the stone, as the market potential for granite remains high in Japan, Hong Kong and Belgium.

On the raw material side, Oriental Trimex has been largely depended on imported marble blocks for processing and selling. In 2005-06, it brought down the consumption of imported raw marble blocks to 38 per cent from 86 per cent.

The company is dependent on just two suppliers for a bulk of the indigenous raw material. Given the huge volume of expansion, the company may need to increase imports. The company has stated in the prospectus that it does not have adequate import licence to meet its current and future raw material requirements. While the import entitlement would be granted based on the company's turnover, the total import by all processing units in India cannot exceed 1.3 lakh tonnes per licensing year. With a number of processing units cropping up (after import of marble blocks was allowed only by processing units) after August 2005, the company faces uncertainties on the raw material front.

Substitutes

Marbles and granite have now found more economical substitutes, which offer similar, if not better, decorative properties. Vitrified and calcareous tiles are some of the options offered at competitive prices. Further, the tile business is more amenable to brand-building and relatively better market shares than the marble and granite business. They also offer better profit margins and would thus provide a superior option for investors looking to ride the realty boom.

Oriental Trimex's equity capital would increase from Rs 5.5 crore to Rs 15.5 crore after the issue. For the year ended 2006, revenues doubled to Rs 50.8 crore after lacklustre performance over the past four years. This growth may not be sustainable.

Offer details: The IPO that opened on February 8 closes on February 14. Allianz Securities is the lead manager.

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