Too small a company and extremely expensive
Fineotex Chemical Limited is tapping the capital markets with an IPO to raise between Rs 25 and Rs 30 crs. The issue had opened on Wednesday the 23rd of February and closes today the 25th of February. The price band is between Rs 60 to Rs 72.
| Price Band | Rs 60 – Rs 72 |
| Offer size in shares | 42,11,160 Equity Shares |
| Issue Size | Rs 25.27 crs at Rs 60 to Rs 30.32 crs at Rs 72 |
| QIB’s | 21,05,580 Equity Shares |
| Non Institutional Investors | 6,31,674 Equity Shares |
| Retail Investors | 14,73,906 Equity Shares |
| Marketcap Post Listing | Rs 67.38 crs at lower band and Rs 80.85 crs at higher band |
| Book Running Lead Manager | Indbank Merchant Banking Services Limited |
| Syndicate Member | Hem Securities Limited |
| Isssue Opening Date | Wednesday 23rd February |
| Isssue closing date | Friday 25th February |
| IPO Grade | CARE grade 2/5 indicating below average fundamentals |
| Paid -up Capital Post IPO | 1,12,29,760 Equity Shares |
| Bid Lot | 90 shares |
| Bidding Amount for Retail | 2700 shares at Rs 72 or Rs 1,94,400 per application |
Business
Fineotex manufactures and trades in Speciality Chemicals and enzymes for textile and garment industry, construction industry, leather industry, water industry, paint industry, Agrochemicals, Adhesives and others. The company has its manufacturing unit near Mahape in Navi Mumbai.
Objects of the issue
The objects of the issue are as follows: –
| 1. | Setting up of manufacturing facility for production of speciality chemicals | Rs 744.10 lacs |
| 2. | Setting up sales office in Mumbai | Rs 180.00 lacs |
| 3. | Working Capital requirements | Rs 800.20 lacs |
| 4. | Meeting public issue expenses | |
| 5. | General Corporate Purposes |
Financials
The company’s net sales have been falling in recent years which are a cause of worry. The net sales were Rs 2986.57 lacs in March 2008, which fell to Rs 2548.61 lacs in March 2009 and to Rs 2074.71 lacs in March 2010. There seems to be some improvement in the current year where the sales have improved in the first six months to Rs 1338.67 lacs. The comp-any has apparently stopped trading of chemicals and that could be the reason for the drop in sales, but there has not been a major impact on profits either. Secondly the company claims to be in the business of manufacturing and trading and if there is no trading in the last one and a half years it becomes quite confusing. Coming to net profit the company has earned a profit after tax of Rs 287.93 lacs in the year ended March 2009, Rs 361.24 lacs in March 2010 and Rs 214.88 lacs in the six months ended September 2010.
The earnings per share on a fully diluted basis are Rs 2.56 based on March 09, Rs 3.21 on March 10 and Rs 3.82 based on september2010 annualised profit.
Comparisons
The company has chosen to compare itself with companies like BASF, Clariant Chemicals and Pidilite Industries. These companies are not comparable on any parameters simply because they are just not in the same league. BASF and Clariant are multinational companies and have a turnover of Rs 1382 Crs and Rs 925 crs respectively. Pidilite has a turnover of Rs 2180 crs. Fineotex has not yet reached a turnover of even Rs 50 crs and therefore these comparisons are unwarranted. MNC companies and market leader always enjoy a premium and Fineotex is not anywhere near that. Yet the issuer company wants a valuation of almost 19 times on its expected annualised September 2010 earnings.
Valuations
Recently an IPO in a similar business of Speciality Chemicals, M/s Omkar Speciality Chemicals was listed on the exchanges. The company had offered shares in a price band of Rs 95-98 and the PE multiple at which these shares were offered was between 10.84 and 11.18 times its September earnings on an annualised basis. The share price of this company has fallen to Rs 35 or a price fall of approximately 64%. If one were to look at it another way at the current market price Omkar a company with a turnover of Rs 52 crs in the first half of September 2010 is available at a PE multiple of 3.88 times. Why should an investor not buy this share instead of applying in Fineotex and face the risk of his capital becoming less than half within the first few days of listing.
Conclusion
I believe one should just avoid the issue and wait for better issues in the next month.
SEBI Disclaimer: – I do not intend to subscribe to the above issue
