VS Fernando's view on SRS Ltd IPO

Without adequate profits, SRS group companies' net worth has been bulging. Who is investing in the group at exorbitant premiums, that too without any returns? In the light of current focus on corporate corruption, fund flow into SRS group in the form of equity merits investigation. Frequently changing companies' names, registered offices, businesses, directors, etc. is indeed the hallmark of SRS group!

OFFER AT A GLANCE
Name	SRS Ltd
Offer Quantity	3,50,00,000 equity shares of Rs 10 each
% on Total Equity	25.13%
Offer Price	Rs 58 to Rs 65
Offer Amount	Rs 203 cr to Rs 227.5 cr
Bid Quantity	100 & Multiples of 100
Bid/Offer Opens	August 23, 2011
Bid/Offer Closes	August 26, 2011
Rated By	ICRA
Rating	3 out of 5
Lead Managers	Karvy, IDBI Capital, SPA Merchant Bankers
Registrars	Beetal Financial

 

 

 

 

 

 

 

Issue

SRS' present IPO is a fresh Issue of 3.5 cr equity shares of `10 each which constitutes 25.13% of the company's post-issue paid-up capital. The offer is being made in the price band of `58 - `65 a piece. Thus, the issue size amounts to `203 cr to `227.5 cr.

Parentage

The Faridabad (Haryana)-based SRS Ltd is the third company to enter capital markets from the SRS stable. The promoters tasted public money for the first time during 1995 primary market boom under the banner Manu Finlease Ltd (MFL). At that time they were presented as `financial experts' qualified to conduct leasing business. Nevertheless, MFL which promised public 10% to 15% dividend in first three years failed to put up a credible performance.

Before MFL could report a tangible performance, the same promoters wanted to float another company viz. Bansla Finlease Ltd in 1996 whose acknowledgement card was subsequently withdrawn by SEBI citing irregularities in the public issue of MFL!

Interestingly, in 2002, SEBI passed an order debarring MFL and its promoters from accessing or being associated with the capital market for a period of five years which was later reduced by the Supreme Court to one year and one month.  MFL's name was subsequently changed to SRS Real Infrastructure Ltd (SRIL).

Bansla Finlease's name was changed to SBS Finance and then merged with SRS Finance Ltd (SFL). Incidentally, SRS Finance too was incorporated during the 1994-95 boom under the name Skytone Capita Services which was later changed to SRS Exhibitors and Hoteliers and then to SRS Finance! 

In 1995 MFL, now known as SRIL, had an equity base of only 3.6 cr post-IPO. At that time, the company had listings at Delhi, Ahmedabad and Jaipur stock exchanges. For more than a decade, one could hardly hear about this company on these exchanges. Come 2011, as a prelude to SRS IPO, SRIL listed its shares on the BSE in January. For the past seven months the Re.1 paid-up share is holding around Rs 40.

Though SRIL's equity has now enlarged to more than Rs 20 cr, it has only 974 shareholders! More than 67% of the stake is officially held by the promoters and the balance 32.84% is held by about 936 shareholders. Yet, the share is showing abundant liquidity sometimes even trading in millions.
How does one justify SRIL's current price? In Fiscal 2010, its EPS was less than 40 paise which is discounted more than 100 times by its current price! In last 3 years, the company earned less than Rs 12 cr but, its reserves shot up from Rs 93 cr to Rs 180 cr. In other words, the SRS group has brought huge amount of money into the company by way of subscription to SRIL's equity at an exorbitant premium which cannot be justified by its reported earnings. By listing the closely-held SRIL's shares on BSE, the exchange authorities have facilitated the promoters to enhance their net worth.  Regulators should wake up if they really want to curb the black money flowing into the official channels of stock market.

If SRIL's credentials are much to be desired, the second public company of the group, SRS Finance is more suspect. This company, despite having an equity base of Rs 98 cr (nearly 5 times of SRIL), is not traded in any of the three stock exchanges it is listed. When SRS Finance's bottom line is less than Rs 0.6 cr, the company has increased its capital base from Rs 3 cr in 2008 to Rs 98 cr in 2010. For a company whose capital base is so large, the shareholder base is just 671. For whose benefit are these companies allowed to be listed? 

The SRS group officially has more than three dozen companies, many of them having common business interests or clauses. When public companies were to compete with closely held firms of the promoters, whose benefit the promoters will serve is anybody's guess.

Business

Present issuer SRS is reportedly engaged in diversified businesses namely cinema exhibition, food & beverages, retail and manufacturing & retailing of jewellery though the company was originally incorporated with the objective of trading in FMCG goods. SRS claims to operate a chain of cinemas spread across 6 cities of North India besides operating a chain of food courts, fine dining restaurants across North and Central India.  The company also claims to operate a chain of retail stores under the brand name SRS Value Bazaar selling a wide range of gold and diamond jewellery procured from its 100% subsidiary.

Object of the Issue

The present IPO amount is proposed to be used by SRS for setting up of additional cinemas (Rs 101 cr), food courts (Rs 40 cr), retail stores (Rs 54 cr), jewellery manufacturing facility and jewellery retail stores (Rs 17 cr). The offer document claims that Oriental Bank of Commerce is part-financing the company's expansion projects with a term loan of Rs 20 cr. All the expansion projects are scheduled to be completed by December 2012.

Prospects

At the end of Fiscal 2011, SRS' Gross Fixed Assets stood at Rs 261 cr and the company reported sales of more than Rs 2000 cr. Its bottom line amounted to Rs 37.51 cr against Rs 104 cr equity. Post-IPO, the company's equity base will increase to Rs 139.29 cr which could be adequately serviced by the company's reported profitability. Except jewellery, SRS is into the businesses that are currently commanding respectable P/Es but, looking at the promoters' track record, will they deliver and justify even the lower price-band of Rs 58?

Concerns

• In nine years the company has changed its name as many as four times, last three changes being within a span of 7 months!
• Registered office of the company has been changed 5 times in 10 years
• Face value of the share changed twice in 13 months, first from Rs10 to Re1 and then Re1 to Rs10
• As many as 8 changes have been effected in directorship in less than one and a half years
• SRS had filed the offer document with SEBI in September 2005 but, withdrew in January 2007 without disclosing a valid reason
• SRS is yet to acquire more than a half of the proposed land for its jewellery manufacturing unit at Noida Special Economic Zone
• Reportedly the company has not entered into any lease or purchase agreement for premises, nor has it placed orders for the machinery and equipments, for the proposed projects.
• 'Sale deeds' were yet to be executed for some of the properties said to have been acquired
• Though reported Rs 57 cr profit at the pre-tax level, the company's operations have failed to generate cash in last 3 years
• Though reported an impressive top line of more than Rs 2000 cr, as much as Rs 1060 cr was booked under trading
• Presently raising large amount  of money for cinemas and food courts whose contribution to the company's revenue was abysmal in last three years 
• Existing bottom line (Rs 37.50 cr) is suspect as the company has a huge inventory of Rs 102 cr and sundry debtors of Rs 271 cr
• Company's funding requirements and the deployment has not been independently appraised by any external agency
• Group companies have objects conflicting with the business of SRS
• Poor corporate governance - delay in payments of taxes
• Asking for a price of not less than Rs 58 from the public though promoters' cost of holding is only between 10 and 20
• Company is asking a hefty premium but, yet to pay dividend! 
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Syndicated by India Aarthik Research (Feedback to vsf@iarlive.in )
* V S Fernando is a veteran IPO Analyst who has been tracking domestic Public Offerings since 1986.