TIPS INDUSTRIES (Fixed Price Portion )

Tera jadoo chalega?

Tips is full of drama and aggression - in promoters' alleged behaviour and projected growth targets

WHEN the largest player in the music industry, Gramophone Company, is traded at a P/E of over 100 times, the IPO from the second largest player, Tips Industries, at a P/E of 17 times (offer price: Rs 325 and 1999-2000 EPS on post-issue equity: Rs 19.4) apparently looks attractive. However, markets give highest weightage to promoters while discounting the earnings. The P/Es of companies operating in the same field with similar growth prospects can vary widely just because of the difference in the quality of promoters and management team.

The reputation of the promoters of Tips Industries was tarnished when Ramesh Taurani was chargesheeted as an accused in the murder of Gulshan Kumar of T-series fame in 1997. The case is pending trial in the session court of Greater Mumbai.

This is not the only reason that will fetch Tips Industries a low P/E. Gramophone is enjoying a high P/E, thanks to its stake in Saregama.com (which is a very successful e-commerce venture). The company's planned ADR, various acquisition plans backed by funds already raised through private placement at huge premium, an invaluable vintage catalogue are Gramophone's significant advantages. So analysts expect sharp growth in its earnings in the next couple of years out of optimal usage of catalogue and operational and financial savings. Tips does not have any of these advantages. Gramo-phone also enjoys a better distribution network in India as well as overseas. 

Tips is perceived to be over aggressive in acquiring new film titles by quoting whopping prices. In fact, it has already made part payment of Rs 31.07 cr (by 15 Aug. 2000) for acquiring audio rights for 57 new films. Such investments are far beyond the company's financial capacity and have been financed by short term borrowings at high interest rates. While such a strategy will help it to get a large marketshare in new film music releases, the risk involved is very high. This also reflects poorly on the management's capacity to manage growth. 

Tips manufactures and markets pre-recorded audio cassettes, blank audio cassettes and replicated compact discs of film and non-film albums. The company markets its products under the registered trademark of Tips. It has a plant at Silvassa which has a capacity to manufacture 21 lakh blank audio cassettes per annum. There are facilities for recording 387.5 lakh audio cassettes per annum at Silvassa and Palghar. The company has a library of around 8000 music albums and this contributes approximately 50% to the revenues of the company. This library includes the acquired audio rights from Video Master, Time Magnetics (India) and Weston Components in 1999 and from Jawaharlal Chopra (proprietor of Oriental Gramophone Record Co. and Oriental Melodies), Swar Sudha Recording Co (Telugu) and Rajshree (Gujrati) in 2000. The most important aspect is that the entire catalogue is digitized. 

The present issue is to fund the company's expansion plan. Tips is expanding its cassette manufacturing facilities (Rs 14.58 cr). It is setting up a compact disc manufacturing plant (Rs 27.49 cr) and a studio for recording music (Rs 10.19 cr). The company plans to increase its marketshare through acquisitions of more audio rights (Rs 120 cr) and forge alliances with overseas companies for distribution and marketing in international markets. The total requirement of funds is to the tune of Rs 187.95 cr. It will be financed by a public issue, a term loan from Bank of Baroda (Rs 3 cr) and internal accruals (Rs 84.95 cr).

Tips' financials improved substantially in the year ended Mar. 2000. Sales were up 105% to Rs 115.82 cr and net profit shot up 216% to Rs 23.58 cr. In the previous four years (1995 to 1999), sales grew at a CAGR of 15% and net profit rose at a CAGR of 50%.

Tips has projected a profit after tax of Rs 35.23 cr on a sales turnover of Rs 151.42 cr for the year ending Mar. 2001. However, much depends on the success or otherwise of the new releases. Till now, the company has not met with any big hit this year.