Bronze Infra IPO opens: Should you subscribe?

Though Bronze sounds like a high-tech infra company, it’s nothing but a low-end ‘sub-contractor’! The company netted an aggregate profit of only Rs 8 lakh in five fiscals but, asks a premium of Rs 2.85 cr!! How will it service a large equity of Rs 17 cr?

The Offer

The Kolkata-based Bronze Infra-Tech Ltd (BIL) is making an initial public offer (IPO) of 57.07 lakh shares of Rs 10 each at a fixed price of Rs 15 a piece aggregating to Rs 8.56 cr. While the Mumbai-based Inventure Merchant Banker, who is lead managing an IPO for the first time, has underwritten 8.56 lakh shares (15.01% of the issue), a little known private company of Kolkata, Sherwood Securities, has underwritten as much as 84.99% (48.48 lakh shares). Subscribers must apply for a minimum of 8000 shares (Rs 1.2 lakh). The shares are proposed to be listed on the SME-Platform of Bombay Stock Exchange (BSE).

Issue Object

BIL intends to deploy Rs 8 cr out of the issue proceeds on projects undertaken by the company as a sub-contractor. It has reportedly secured sub-contracts worth Rs 39 cr from Jain Infraprojects (Rs 14 cr), Coastal Projects (Rs 15 cr) and Anil Contractors (Rs 10 cr).

Background

The company was originally incorporated as Shivpujan Agencies (P) Ltd in 2004 with the object of trading in textiles by Amit Baidya and Mukesh Bhuwalka. In May 2010 Competent Textiles (P) Ltd acquired 2,56,400 shares of the company representing 99.96% of the then paid-up capital. Accordingly, it became a subsidiary of Competent Textiles, which is promoted by Manoj Kumar Bajaj and Punit Sureka. Currently Competent Textiles holds 72.5% of the pre-Issue paid-up capital of our Company, while the individual promoters Bajaj and Sureka holds 1.45% each.

Whereas Bajaj (34) started his career in Indiabulls Securities Limited as a relationship manager, Sureka (33) started his career with Green Ply Industries. He was also a proprietor of Bhutnath Construction which was engaged in the business of civil construction and trading. It is under the guidance of the present promoters that the company decided to change its objects and entered into construction and IT Supply activities in FY 2012-13.

Track Record

Till FY 2012 the Company was engaged in the business of textile trading. Between 2008 and 2012, the company had a highly fluctuating top line and a dismal bottom line. From Rs 16 cr in 2008, revenue dropped to Rs 5 cr in 2009 and leapt to Rs 22 cr in 2010. In the very next year, turnover crashed to Rs 27 lakhs. In fiscal 2012, turnover stood at Rs 3.8 cr which shot up to Rs 12.6 cr in the first four months of fiscal 2013. For the five years up to fiscal 2012, the company netted an aggregate profit of less than Rs 8 lakhs and in the first four months of fiscal 2013, it posted a profit of Rs 9.7 lakh.

Even while the profitability was negligible, the company raised capital at a huge premium of Rs 190 per share and took the net worth to more than Rs 17 cr. Interestingly most of the money came from little known private companies (about 30) whose ownership was not disclosed. The Return on Net Worth was so pathetic that the average for the last three years did not come to even 0.5%!

Notwithstanding dismal earnings, the company enlarged the capital from Rs 26 lakh to Rs 11.5 cr in 2012 through a bumper 12:1 bonus issue and Rs 8.12 cr preferential allotment at a premium of Rs 5 per share to promoters and their associates. Perhaps, the build-up of net worth may justify the offer price but, the current bottom line bottom line of less than Rs 10 lakh for first four month of fiscal 2013 is too small to service the post-issue capital of more than Rs 17 cr.  

Prospects

The company claims to have an order book of Rs 39 cr in the construction and infrastructure segment and Rs 10 cr for supply of IT equipments. How much will it earn on execution of these orders? Even though infra construction still appeals investors, BIL is engaged in the lower end of the segment mainly concentrating on excavating, spreading, leveling, ramming, watering of land acquired for industrial purpose. What’s more, most of its work orders are sub-contracts in nature which yield very low margin. Also, there is no justification for an Infra sub-contractor acting as IT equipment vendor.

It appears that the promoters of BIL somehow wanted to put up a business model in order to get a listing on the stock exchange. But, their nature of businesses, capability of the key management personnel and their funding plans are far from convincing.

Valuation
The average cost of acquisition for Competent Textiles is Rs 9.06 while the cost works out to Rs 14.94 to both Bajaj and Sureka. In fact, BIL’s earnings and issue pricing have no co-relation. Between 2005 and 2008, despite no financials to support, the company issued shares through private placements at an exorbitant price of Rs 200 a piece. The cost of these shares were averaged out to Rs 15.38 on the eve of the public issue (in July 2012) with a bumper 12:1 bonus issue by capitalizing the unjustifiable share premium collected earlier. The present issue price (Rs 15) too finds no co-relation with the company’s current earnings. While most of the well established infra construction scrips are currently available at a P/E of less than 8x, BIL has priced at a P/E of more than 59x!

Investment Banker’s Track
BIL’s is the first IPO lead-managed by the Mumbai-based Inventure. Despite having significant experience in stock broking, Inventure has underwritten only 15% (Rs 1.28 cr) of the issue. Interestingly, a little known Kolkata company, Sherwood Securities, who are the market makers to BIL’s IPO, has underwritten 85% (Rs 7.27 cr). Who controls Sherwood Securities and why are they underwriting far more than the market makers’ quota of 15% are worth looking into.
Concerns

• Inexperienced promoters who are new to investors asking for a hefty share premium for a non-dividend yielding share

• Private company whose net worth is just Rs 5.4 lakh and bottom line is negligible (Rs 2700 only) invests Rs 7.5 cr in public company.     

• Pathetic past financials to justify any premium.

• Negative cash flows from operations for three out of four years

• Company does not have adequate experience in Construction Industry and have not generated any revenues in last three fiscals from the activity for which funds are being raised in the issue.

• Funding requirement and deployment of issue proceeds are not appraised by any bank or financial institution.

• Predominantly being a sub-contractor, payments on projects depend on the performance of principal contractor.

• Registered office changed four times in five years. 

• 24 year-old independent director whose occupation is “Service” has no qualification.

• Key management personnel (Chief Financial Officer, Company Secretary and Project Manager) are only in the twenties.