Should you subscribe to Comfort Commotrade IPO?

Comfort Commotrade Ltd (CCL) IPO: Comfort for promoters, misery for public!

Even after 17 long years, Re 1 paid-up share of their maiden public venture is languishing at just Rs 1.40! As a matter of fact, rights shares were issued at a price of Rs 4 in fiscal 2011. But, the dismal record of the flagship does not deter the promoters from floating another public issue under different banner.

The Offer
The 2007-incorporated Comfort Commotrade Ltd (CCL) is making a fixed price issue at par offering 60 lakh shares. The Mumbai-company has appointed the Delhi-based Narayan Securities Ltd as `Market Maker’ who is subscribing to 5.1 lakh shares valued at Rs 51 lakhs. The balance 54.9 lakh shares (Rs 5.49 cr) are being offered to the public. The entire public portion is underwritten by the Kolkata-based lead managers to the issue, VC Corporate Advisors. Applicants to this issue should apply for a minimum of 10,000 shares (Rs 1 lakh). The shares are to be listed on the SME platform of BSE.

Object
The main object of CCL’s offer is to set-up two regional offices one in Chennai and another in Hyderabad at a total cost of Rs 6.6 cr.

Parentage
CCL belongs to the Comfort group which has many companies engaged in financial and broking activities. The promoters are not new to the investing public. Exactly seventeen years ago (September 1995) during the height of the unprecedented primary market boom, they tasted public money (Rs 2.5 cr) through Comfort Fininvest Ltd (CFL). This company promised to undertake the business of market intermediaries like merchant banker, registrar and transfer agent. At the time of going public, the promoters’ stake was put at 37.5% in a capital of Rs 4 cr. Today (FY12) the company claims to have a net worth of about Rs 90 cr including a share premium of around Rs 50 cr. Of the present capital of Rs 32 cr, the promoters have a controlling stake of more than 51%. Interestingly, while the net worth is growing exponentially through fresh fund infusion, the company’s top line has crashed from Rs 118 cr in fiscal 2011 to just Rs 16.11 cr in fiscal 2012. It is intriguing that the promoter’s stake in CFL has gone up from just Rs 1.5 cr in 1995 to over Rs 15 cr in 2010 even while its operating performance remained pathetic. Currently known as Comfort Intech Ltd, CFL is languishing at a dismal price of Rs 1.40 (paid-up Rs 1) on the BSE. While the maiden public venture of the group deviated from its proposed line of activity, another closely-held company of the group, Comfort Securities Ltd took up the business of investment banking.

Whereas the maiden public company of the group failed to put up a credible performance, the promoters changed the name of a 1982-registered textile company, Parasnath Textiles Ltd, into Comfort Fincap Ltd and got into the business of investment and trading in securities. This company, already listed at Kolkata, Delhi and UP Stock Exchange, applied for BSE listing in October 2011 last year. Investing public deserve to know why BSE has not granted listing till date.

A close look at the group financials reveals that a significant amount of fund infusion at a hefty premium took place in and around fiscal 2011. Most of the funding has been routed through rights issues. When the companies’ operational record is far from convincing, who did subscribe to the rights at an unjustifiably high premium? The group’s credentials would certainly make any investor uncomfortable. In this backdrop CCL IPO raises serious doubts about the promoters’ intention.

Business & Prospects

The five-year old CCL is engaged in the business of commodity broking. The company is a member of MCX and NCDEX and offers trading in many commodities such as gold, silver, crude oil, natural gas, metals, rice, maize, spices, edible oils, etc. CCL claims that its promoters have more than 20 years of experience in the field of capital markets and have developed a good client base and technical capability which would boost the prospects of the company. When the performances of promoter majority-owned group companies engaged in related activities are far from convincing, how CCL with a promoter minority stake of 40% would fare is anybody’s guess.

Interestingly, Comfort Securities Ltd (CSL) where the group’s listed flagship Comfort Intech holds 49% is also a member in the cash and derivative segment of both BSE and NSE. This company reported Rs 5.59 cr gross revenue on a net worth of more than Rs 16 cr. How CCL will compete with CSL in commodity trade remains to be seen.

Brokerage Discounting
Currently, there are 30-odd brokerages in the listed domain of which a majority of them are having dismal bottom line. More than 40% of them are quoting below their book value. When main board listings are in such a plight, how will an SME listing fare once the market maker quits the scene is anybody’s guess.

Manager’s Track
Comfort is the first IPO managed by VC Corporate Advisors in two years. The last issue with which the investment banker associated was RPP Infrastructure in November 2010. This scrip is currently quoting at a discount of 43%. The previous one, Galantt Ispat, which hit the market in September 2010, is currently available at 14% lower than the IPO price.

The same merchant banker was very active during the mid-nineties primary market boom and managed nine public issues in just 13 months (between May 1994 and May 1995). Of the nine issues, five are currently not traded and one is quoting at 73% discount. However, a couple issues have fetched sizeable returns.

Concerns

• Uncomfortable track record of the group
• Group companies have faced many penal actions from exchange authorities for violating regulations
• Existing listed companies of the group have fetched dismal returns
• Public company faces conflict of interest as closely held group companies are engaged in similar activities
• Company financials far from convincing Total expenses accounted were only Rs 31 lakhs in fiscal 2012 but, Creditors have gone up by Rs 43 lakhs!
• Operating cash flow was negative in three out of five years
• Against the post-issue capital of Rs 10 cr, existing bottom line is just 0.2 cr!
• Limited geographical coverage and dependant on growth in commodity broking which is a nascent industry
• Commodity broking/trading is prone to excess government regulation as speculations could aggravate inflation
• Threat of stiff competition as there are no entry barriers
• Entire issue proceeds are to be spent on office premises which is unlikely to fetch any return in the short run
• Auditors have been changed on the eve of the issue!

*V S Fernando is a veteran IPO Analyst who has been tracking domestic Public Offerings since 1986.