Renuka wants to raise 270 million rupees to repay high-cost loans and modernise packing plants, inter-crop coconut plantations with short-term crops like soya and maize, and acquire its own distribution channels locally and in Europe.

After the public offer, the number of issued shares will go up 401.2 million from the current 281 million and the public will hold 30 percent of the firm.

Single Digit

Deshan Pushparaja of Capital Alliance, the issue's placement agent, said the firm has a growing market share in value added coconut products, strong financials and very little leverage which means the company can borrow in the future.

"The IPO is under-valued at a P/E (price-earnings ratio) of four times," he told a news conference.

"It is an immediate value realisation investment at 2.25 rupees. It is not only a value stock but also a growth stock," Pushparaja said.

In the past six months Renuka Agri Foods made a net profit of 110 million rupees, up from 55 million rupees a year earlier.

Assuming that profitability is maintained and the firm makes at least 220 million for the year, and not counting any interest savings from loan retirements, earnings per share (after the issue) would be 55 cents.

At the issue price of 2.25, the stock is being offered at four times profits or price earnings multiple.

Colombo's market price earnings multiple is 14.4 on historical earnings based Colombo Stock Exchange data.

In foreign markets Renuka Agri Foods competes with exporters from the Philippines, Thailand, and Indonesia. Renuka says their main competitor in the local market is Nestle.

Based on annualised profits up to September 2009 Nestle is now trading at about 12 times profits.

Export Focus

Renuka Agri Foods director Shamindra Rajiyah said it exports to 52 markets through a global distribution network which gives it established export channels.

It is also looking to set up its own distribution channels in Europe to sell its branded products.

It has contracts with overseas buyers like supermarket chains, hotels, airlines and food businesses.

"We export 50 percent of our products under our own brand. Pricing is determined by us on a quarterly basis. We have quite a lot of leeway in controlling pricing," Rajiyah said.

About 20 percent of Renuka Agri Foods' exports are bought by the Caribbean group, Grace Kennedy’s subsidiaries in Jamaica, United States, Canada and the United Kingdom including Grace Foods.

Grace Foods is a big UK food company, supplying speciality and ethnic food products, which has invested 22.5 million rupees for an eight percent stake in Renuka Agri Foods.

Fluctuations

Rajiyah also said the firm's contracts with coconut suppliers meant it was confident of being able to procure enough raw material despite fluctuations in the crop that are sometimes caused by drought.

The firm's switch from using furnace oil to a coconut shell powered boiler had helped lower energy costs, he said.

Pushparaja said the firm's gross margins had improved after the switch.

The food-based industry is also a defensive industry and even in the current economic downturn Renuka Agrifoods has been able to grow its sales, he added.

The firm's profits are exempt from income tax up to June 2015 after which it is liable for taxation at the rate of 15 percent for ten years up to June 2025.

Dividends paid by the company out of exempt profits during the twelve-year tax holiday or within one year thereafter are exempted from taxation.