CRISIL has assigned a CRISIL IPO grade of ‘3/5’ (pronounced "three on five") to the proposed IPO of Varahi Ltd (Varahi). This grade indicates that the fundamentals of the IPO are average relative to the other listed equity securities in India. However, this grade is not an opinion on whether the issue price is appropriate in relation to the issue fundamentals.
The grade is not a recommendation to buy, sell or hold the graded instrument, its future market price or suitability for a particular investor. The assigned grade takes into account Varahi’s established position in the Indian packaging industry, which is on a sustained growth trajectory thanks to the growth in end-user industries – mainly FMCG and pharmaceuticals.
CRISIL Research expects this industry to grow at 13-16% CAGR over FY11- 14. The grade factors in the company’s focus on innovation and product development, ensuring cost savings for its clients. The grade also reflects the company’s long-standing relationship with its clients such as Dabur, Perfetti Van Melle and Bajaj Corp, which has translated into repeat orders and provides revenue visibility. Promoter’s sound technological knowledge has encouraged product innovations, which has helped in creating a strong brand image. Further, the proximity of Varahi’s manufacturing units to key clients’ operations ensures timely delivery of its products and lowers logistic costs.
However, the grade is constrained by the highly competitive nature of the packaging industry due to the presence of a large number of unorganised players and low entry barriers. Hence players have limited bargaining power. However, continuous product innovation helps in strengthening client relationships and may provide better margins.
In addition, Varahi’s high client concentration (two large clients accounted for ~80% of FY11 revenues) remains a key risk. Further, successful completion of the proposed capacity expansion remains a key monitorable. On the corporate governance front, independent directors have significant experience in the plastics industry but their management oversight needs to be further strengthened. Also, related party transactions remain a key monitorable.