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Arihant Capital has come out with IPO analysis note on Sita Shree. It has recommended to ignore Sita Shree Food Products IPO.

It has opened for subscription with an initial public offering equity shares of Rs 10 each at a price band of Rs 27-30 per share aggregating Rs 31.5 crore.

Arihant Capital report on Sita Shree Food Products IPO.

Investment Positive:
Experience and Customer Base - The promoters of SSFPL are in the business of food grains trading since last 35 years. This helps the Company to procure its raw material at competitive prices throughout the year. It is benefited due to the past track record of the promoters in sourcing commodities as well as running existing business. Also By virtue of the presence in the industry for a considerable period of time, the Company has been able to develop a customer base which can be leveraged for the expanded operations as well as new products manufactured through proposed project.

Concerns:
* Competition - Much of the Indian food processing industry is unorganized and fragmented with many small and medium-sized companies. The Company is facing competition from around 5-6 mid-sized flour mills in Indore region for its existing products. Besides small unorganized sectors the Company will also face stiff competition from major players like Ruchi Soya Industries Ltd, Gujarat Ambuja Exports Ltd, K S Oil etc. for marketing of products manufactured through proposed project i.e. Soya Oil, lecithin.
* Nature of Business - The business of the Company is seasonal in nature and hence the Company requires substantial working capital for maintaining the stocks. Any shortage in working capital finance will affect the operations of the company and have an impact on the profitability. Also the company operates in very low profitability margins. The present capacity utilization of existing flour mill is 64.15% in spite of which the Company is planning to set up a new flour mill with a capacity of 275 TPD per day.
* The Company at present does not have existing marketing network. The Company will face difficulties to market its existing as well as proposed manufacturing products particularly in branded segment which has higher margins. Also the company is venturing into solvent extraction and lecithin in which the company lacks experience.

Recommendation:
SSFPL makes wheat products which are sold mainly in bulk form. Operating profit margins in this business, however, have been thin, hovering in the 3 per cent range in recent years. In spite of the expansion plans of the company, margins may continue to be wafer thin, given competition from much larger and unorganized players in the flour milling segment.

Based on the valuations the company looks to be priced expensively as compared to its peers. Keeping in mind the competition faced by the company, seasonality nature of the business and valuations we recommend our investors to ignore the issue.

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Source: Moneycontrol.com