The IPO from Speciality Restaurants Limited better known as ‘Mainland China’ was subscribed. The company had launched its IPO in a price band of Rs 146-155. The issue was open between the 16th and 18th of May and was subscribed 2.54 times. The total issue size was 117.39 lac shares of which 17.61 lac shares were allotted to anchor investors at a price of Rs 150.

The issue received support from QIB’s particularly domestic mutual funds who subscribed to 123.13 lac shares against a total of 253.79 lac shares which were bid for. The retail portion remained undersubscribed and received bids for 22.79 lac shares against a quota of 41.09 lac shares. The retail portion was subscribed 0.55%.

The markets were weak on Friday mirroring global markets. The subscription levels as of the penultimate day were a mere 0.02%. The markets began recovering after a stellar performance from State Bank of India. The bank announced results which have bettered the most optimistic result on the street by miles. Shares of SBI which had closed at Rs 1,848 on Thursday zoomed to close at Rs 1,942, a gain of Rs 94 or 5.08%. SBI results changed the sentiment in the market and the BSESENSEX recovered from its intraday low of 15,809.71 points to close at 16,152.75 points, an intraday gain of 343.04 points and a net gain on closing basis of 82.27 points. The timing of SBI results leading to the recovery in the markets and the response to Speciality Restaurants issue seem to be interlinked.

The details of the subscription level in various categories are given below: -

Anchor investors were allotted at a mid-price of the band at Rs 150. I believe that the issue is likely to get priced at Rs 150 or thereabouts as the overall response was poor but considering the market conditions it is not so bad. The issue was expensive and considering that fact, retail investors avoided the issue. The company is in the business of food and serves non-vegetarian food as well making a section of investors avoid the issue.

All in all the subscription in trying times is an achievement and one would expect that post listing in the ten day period when the share trades in trade-to-trade category it trades at par if not higher.

Valuation Expensive – Hence Avoid

Speciality Restaurants Limited (SRL) is tapping the capital markets with its issue for 1.17 lac shares in a price band of Rs 146-155. The issue has opened on Wednesday the 16th of May and closes today the 18th of May 2012. The company has allotted 17.61 lac shares to anchor investors at a price of Rs 150 per share. With just one day left for the issue to close the company has received subscription for 2.23 lac shares which is a mere 2% of the issue size. All the bids have been received from retail investors, and not a single bid as yet has been received from QIB’s or HNI’s.

Business
SRL as the name suggests is a speciality restaurant chain operating 69 restaurants and 13 confectioneries under the brand name Sweet Bengal. The restaurants have the flagship brand as ‘Mainland China’. The other brands under the company include Mainland China, Oh Calcutta, Sigree, Flame & Grill, Haka, Just Biryani, KIBBEH, Kix, Machaan and Shack. The company operates a mix of company owned and company operated or a ‘COCO’ model as well as a franchisee owned company operated ‘FOCO’ model. Of the 69 restaurants, 49 are company owned and 20 are franchisee owned. The flagship brand Mainland China has 36 outlets mainly in Western India. The second brand Oh Calcutta has seven restaurants in India and one in Bangladesh. Sales from Mainland China accounted for over 60% of total sales for the company in March 2011 and a little over 61% in the nine month period ending December 2011.

The company SRL believes in offering the guest a fine dining experience and this necessarily means that the guest has to visit the restaurant and experience the service, ambience and food. The business is all about dining in the restaurant. This cannot be experienced by taking the food away or ordering the food at home. The profits come from Mainland China and the business going forward would be to increase the number of stores or restaurants under this model.

In case of franchisee stores the model is that the company takes an upfront fee depending upon the individual location and city and then a fixed percentage of revenues. All other expenses are borne by the franchisee owner. Effectively this means that only the revenue share of SRL is booked in the financials of the company and this effectively goes to the bottom line increasing margins.

Objects of the Issue
The objects of the issue are as follows: -

The company plans to open 16 stores in fiscal 12, sixteen stores in Fiscal 13 along with the food plaza and banqueting facilities in Kolkata and 12 stores in Fiscal 14. The focus would be on leveraging Mainland China brand name and using the same to open multi brand restaurants in Tier 1 and Tier 2 towns.

Financials
The company’s revenues have grown from Rs 130 crs in year ended March 2010 to Rs 175 crs in March 2011 showing a growth of 34%. The revenues in the nine month period ended December 2011 have reached a level of Rs 152.11 crs implying an annualised turnover of Rs 202.81crs. The growth in the current year is therefore fairly muted at 15.89%. The company has added 8 stores in the eleven month period up to Febraury 2012 compared to the previous year.

The slower growth can be attributed to the challenging environment and the fact that the flagship brand is the one that does well, while other brands are yet to be established. It would be the endeavour of the company to ensure that the other brands particularly Oh Calcutta is stabilised. All future growth would evolve leveraging Mainland China and trying to cross sell the brand with other brands.

Track Record of Merchant Bankers
The merchant banker for the issue is Kotak Mahindra Capital Company Limited. In the three year period track record that the banker has given shows that of the 13 issues that were brought by the banker, 4 were trading at a discount one month after listing and 9 weretrading at a premium. The 10 issues that he has given details of, show that as many as 8 were trading at a premium, 30 days after listing while a mere 2 were trading at a discount. If one were to change the same to current prices as of date, the data and situation is dramatically the opposite. Of the same 10 issues as many as 8 are trading at a discount while a mere 2 are trading at a premium. Very clearly the track record indicates that the investor needs to look at the issue on his own and take a conscious decision and also do his own homework before applying to an issue.

I am tempted to write about one glaring issue which was handled by a galaxy of merchant bankers including the current Banker Kotak Mahindra. The issue in question is SKS Microfinance. This company raised Rs 1,629 crs at a price of Rs 985. The share touched a high of Rs 1,489 and in less than 6 weeks began to fall and made a low of Rs 75.85 last week, and closed yesterday at Rs 81.95. The point being emphasised is the amount of due diligence being done in assessing risk. One single political risk has destroyed the company and its shareholders wealth. The share price has fallen more than 94%. This is a rare case but has happened in the last two years. This makes us believe that the principle of Caveat Emptor ‘BUYER BEWARE’ is applicable only for investors and to be ruthlessly followed by investors in letter and spirit.

Comparisons
There is no comparison for SRL from any listed entity. The closest one can compare this company from the non-listed space is the brand Blue Foods which runs restaurants like Copper Chimney, Cream Centre, Bombay Blue and Noodle Bar. The company has not compared itself with anybody as there is no comparable in the listed space. The market is trying to compare this chain with a Quick Service Restaurant (QSR) like Dominoes Pizza. In the case of Dominoes they are an international chain and their business depends primarily on home delivery and takeaways. Jubilant is a master franchisee and pays royalties to the parent. In the case of SRL the brand is owned by the company. The concept of fine dining does not exist. For such stores, the time to deliver, number of orders per delivery boy or revenue per delivery boy, revenue per square foot, same store growth, number of outlets added etc become key matrix for evaluation of the company.

Some of the key statistics for Dominoes which is listed in India under Jubilant Foodworks Limited shows that the company added 87 stores in the year ended 2012 to take the total stores to 465 stores. The stores added in 2012 are slightly more than the total number of restaurants and confectioneries run by SRL. In terms of growth, the overall revenue grew by 50% to Rs 1,017.50 crs while same store growth was 29.6%. The EBITDA was up 59% at Rs 190.6 crs while Profit after tax was up 97% at Rs 105.6 crs. The numbers are strong and there is no way a fine dining restaurant can ever have similar additions in number of restaurant or this kind of growth. Trying to compare apples and oranges is neither fair to the apple nor orange. I believe investors should look at the business of SRL as the concept of eating five star food in five star ambience at affordable rates and certainly much cheaper than five star charges.

Valuations
The shares of Speciality Restaurants are being offered in a price band of Rs 146-155. The EPS of the company for the year ended March 2011 is Rs 4.55 on the pre-IPO equity capital of 352.18 lac shares. This translates into a PE of 32.09 times at the lower end of the price band and 34.07 times at the upper end. If one looks at the EPS for nine months on old capital it is Rs 4.26. If one were to annualise the same to 12 months and then consider the new capital, the EPS becomes Rs 4.36. On this EPS the PE ratio is 33.51 times at the lower end of the price band and 35.58 times at the upper end of the price band. This valuation is certainly not cheap even considering that the company is in the ‘Consumption’ theme, which is one of the better sectors of the economy.

Clearly the valuation which is at roughly 34-36 times leaves nothing for the investor and one would have to wait patiently for returns.

Concerns
The biggest concern is that it is only the flagship brand Mainland China which is doing well. Secondly the company was able to add only 8 stores in the 11 month period ended February 2012 and it appears the targeted growth/addition of 16 stores each over the next two years may not be achievable. Same store growth seems to be quite poor and it looks the growth is at best linked to inflation which does not augur well for the company. The fine dining segment or the premium segment in which the company is currently is not earning enough margins to justify the positioning or the premium being charged.

Conclusion
It’s a good theme based company tapping the capital markets. The issue was being pushed around or marketed as the second QSR, or a company comparable to Jubilant Foodworks. The company is good, has a great potential, is likely to do well in future if it capitalises purely on the Mainland China brand. Everything is good except the price. As new stores open and the company add to its total number of stores over the next three years, there would be a severe pressure on net margins. This pressure would affect the earnings of the company and therefore its market price. The management of the company says it costs roughly 3crs to set up on large restaurant of Mainland China along with the lease deposits for the place. IF one does a back calculation one is unable to understand how the valuation of Rs 515-546 crs is arrived at.

The current market scenario is quite depressing globally. One needs to conserve cash at this point of time. Sectors which are favoured do well at good times and seem over valued at bad times. The challenges outweigh the growth prospects and whatever is left on the positive side gets balanced out because of the over aggressive pricing. It is in the interest of investors to avoid investing currently and look at the same company post listing.

SEBI Disclaimer:- I do not intend to subscribe to the above issue.

Speciality Restaurants Limited which is tapping the capital markets with its IPO for 117.39 lac shares in a price band of Rs 146-155 completed its anchor allocation yesterday. The company allocated 17,60,912 shares to five investors at a mid-price of Rs 150. The issue for other investors opens on Wednesday the 16th of May and closes on Friday the 18th of May 2012.

The complete list of Anchor investors with the shares allotted is as under: -

Speciality Restaurants Limited which is tapping the capital markets with its IPO for 1,17,39,415 shares announced the price band as Rs 146-155. The issue opens on Wednesday the 16th of May and closes on Friday the 18th of May. The company would be raising Rs 171.39 crs at the lower end of the price band and Rs 181.96 crs at the top end of the price band.

The company currently operates 82 restaurants and confectioneries. Of these 82 stores, 49 restaurants are owned and operated by the company, 13 confectioneries and there are 20 franchisee owned company operated restaurants. The flagship restaurant of the group is ‘Mainland China’.

Revenues in the year ended March 2010 were Rs 129.75 crs which grew by 34.91% to Rs 175.06 crs in March 2011. In the current nine months period ended December 2011 the revenues have grown to Rs 152.11 crs and on an annualised basis to Rs 202.81 crs or 15.85%. The net profit after tax for the same period has moved up from 9.65 crs to 16.02 crs or 65.95%. In the current year the profit for nine months is Rs 15.01 crs which on an annualised basis has increased to Rs 20.02 crs or 24.97%.

The company is being compared to global fast food chain Domino’s Pizza whose master franchisee is Jubilant Foodworks Limited. This company has reported numbers for the year ended March 2012 and a quick snapshot shows that the company opened 87 new stores in Fiscal 2012 taking the total stores to 465 stores. The revenues were up 50% to Rs 1017.5 crs while Net Profit was up 47% to Rs 105.6 crs. Same store growth which is a key in retail business has grown at 29.6%. The company has also become master franchisee for Dunkin Donuts.

The shares of Speciality Restaurants based on nine months annualised EPS of Rs 4.25 are being offered at a PE multiple of 34.35 times at the lower end and 36.47 times at the upper end of the price band.

The company begins its road shows for marketing the issues from today in Mumbai and does anchor allocation on Tuesday.

The issue would be analysed over the next two days.

Plastene India Limited is tapping the capital markets with its IPO for 92.55 lac shares in a price band of Rs 81-84. The IPO has opened on Wednesday the 9th of May and closes on Monday the 14th of May. With just one day to go the subscription received so far is a mere 26% of the issue with not even a single bid from QIB’s. The retail portion has been subscribed 3% while the bulk of the subscription has come from HNI’s who have subscribed 1.65 times of their quota. The book is being made at the lower end of the price band at Rs 81. There have been quite a few instances in the past, where the HNI subscription gets withdrawn or at the time of submitting the ‘ASBA’ application the same gets technically rejected.

Business
The company began its manufacturing activity in 2005 when it set up its unit to manufacture woven sacks and woven fabric at NaniChirai unit in Gujarat. Currently the company manufactures Jumbo Bags also known as FIBC (Flexible Intermediate Bulk Containers), woven sacks, flexible packaging, woven fabric and tarpaulins. The company is also a distributor for Indian Oil for polypropylene in the state of Gujarat. The company has a total of six plants, four of which are located near the ports of Kandla and Mundra and two in Mehsana district of Gujarat. Currently about half the sales revenue is from exports and the company exports to 30 countries.

Being a distributor of IOC for polypropylene, about 3/4th of the raw materials are sourced indigenously and only about 1/4th of the same is imported. The company’s customers include leading players from the cement, fertilisers, salt, edible oil, food grains, sugar and rice industries. It has a presence wherever packaging plays a key role in retail and bulk packaging.

The company has set up a unit in Kandla Special Economic Zone which will allow the company a 50% tax exemption till 2015-16. To increase its sales efforts Plastene India proposes over the next two years to establish offices/warehouses in two overseas locations. The company also plans to spend on brand building and new products, liners for the bags to increase the applications and hence develop sales.

Objects of the Issue
The objects of the issue are as follows: -

Financials
The company has reported revenues of Rs 313.30 crs in the year ended March 2010 which have risen sharply to Rs 484.42 crs in the year ended March 2011. In the current ten months ended January 2012, there is a substantial drop in sales to Rs 382 crs. Even if one were to annualise the sales at best they would be 458 crs. The company has a very large component of traded sales in the total sales which were at Rs 105 crs for March 2010, Rs 175 crs for March 2011 and Rs 77 crs for the ten month period January 2012.

The net profit for the period ended March 2010 was Rs 13 crs which improved dramatically to Rs 21 crs in March 2011 and has fallen as dramatically in the ten month period to Rs 10.21 crs. The fact that the current result is for 10 months would on an annualised basis indicate in the region of 12.25 crs, substantially lower than the previous year. The margins seem to be under severe pressure and interest costs seem to have risen quite sharply.

The company has extremely high debtors and they seem to be rising. In the year ended March 2011, sundry debtors were at 67 days sales considering even the traded sales which were 36% of total sales. The same have risen sharply to 87 days even though the traded sales are now only 20% of the total sales. If one were to exclude traded sales and assume that there is no credit extended to these sales the debtor days in year ended March 11 were 105 days. This has increased sharply to 131 days in the 10 month period ended January 2012.

This explains why interest costs have risen sharply by 162 basis points from 3.91% of sales to 5.53% of sales.

The EPS of the company based on Pre-IPO capital of 264.93 lac shares is Rs 4.90 for the year ended March 2010, Rs 7.93 for March 11 and for the 10 month period ended January 2012 Rs 3.86. If the same were to be annualised and computed on a fully diluted basis of equity capital of 357.48 lac shares it would be Rs 3.43. The PE based on this EPS would be a staggering 23.62 times at the lower end of the price band of Rs 81 and 24.50 times at the upper end of the price band of Rs 84.

One is not sure whether at such valuations investors could ever make money.

Track Record of Merchant Bankers
The company has just one merchant banker, MotilalOswal Investment Advisors Private Limited. The banker has given details of four issues in which they acted as merchant bankers. At the end of the 30th day after listing, 2 issues were trading at a premium while 2 issues were trading at a discount. If one were to look at the performance based on closing prices of Friday the 11th of May, the performance would remain the same as two positive and two negative, but the scrips have interchanged.

What is not disclosed in the track record is the poor performance of an issue Galaxy Surfactants Limited which was handled by this merchant banker. The company had tapped the capital markets in May 2011 in a price band of Rs 325-340. The company allotted 8.89 lac shares at the top end of the price band to 3 anchor investors and on the day of closure of the QIB book received 59% subscription only. There was one day of subscription left for HNI’s and Retail investors. The HNI portion was subscribed 4% and retail portion a mere 11%. The overall issue was subscribed 30%. The issue was withdrawn.

The present issue has a lot of similarities with the issue of Galaxy Surfactants. The issue is in the month of May, is from the same merchant banker and suffers from the same problem of being extremely expensive. To add insult to injury, the merchant banker and the promoters of the company deem it fit to not even have a road show for the media and analysts in Mumbai which is the Financial Capital of India. Any issue planning to list on the premier stock exchanges of India whether it is the Bombay stock Exchange or the NSE, needs to have atleast a road show in Mumbai. The argument that the company is a Gujarat based company and therefore has road shows only at Ahmedabad and Rajkot does not hold good if the company plans to list at the exchanges in Mumbai and not a regional stock exchange like Ahmedabad.

Comparisons
The company has chosen to compare itself with nine other players from the jumbo bag or FIBC space and also flexible packaging manufacturers. Some of the woven sack and jumbo bag players are Flexituff International, Jumbo Bag, Kanpur Plastipack and EmmbiPolyarns. In flexible packaging comparisons have been done with Uflex, Paper Products, Karur KCP Packaging, RadhaMadhav and Glory Polyfilms.In the first category of jumbo bags and woven sacks the closest competitor is Flexituff International who has sales of Rs 148 for the December quarter and if annualised would be Rs 600 crs. The net margins enjoyed by Flexituff are 5.48% which is double that enjoyed by Plastene which clocks 2.69% as net margin.

Plastene is a smaller company, enjoys half the margin yet expects substantially higher valuations than the listed player. Surely there is something which we potential investors do not understand or what the company would like us to know.

It appears that realising there would be questions on the valuation which could be embarrassing; the company chose not to come to Mumbai for any road show.

Valuations
The shares of Plastene India are being offered on a fully diluted 10 month ended January 2012 annualised basis at a PE of 23.62 times at the lower end to 24.50 times at the upper end of the price band. This is based on the 10 months period ended January 2012 net profit of Rs 10.21 crs annualised, resulting in an EPS of Rs 3.86. The valuation is certainly steep and offers no scope for exit for the investor in the short to medium term.

Concerns
The valuations are extremely expensive and offer no scope for appreciation in the short or medium term. The industry is highly competitive and there were two companies which tapped the capital markets in September 2011 from the same field. Plastene was also expected to hit the market at that time but delayed the issue. Call it coincidence or any other name the performance for 2011 fiscal was impressive but has literally become half in the current year and is a major cause for worry. Almost all large players in this business have foreign offices or warehouses to offer just in time delivery to their buyers. High risk takers expecting the management of the company to bail out investors may apply. Retail investors should stay away as the share offers no fundamental gains on either valuation or the nature of business.

Conclusion
Plastene is one more example of greed of the promoter and the merchant banker in pricing the issue at extremely high valuations. There is no scope for appreciation in the short or medium term unless friendly intermediaries decide to bail out the company. The business is undergoing tough times what with the economic conditions in Europe. The performance in the current year for the company has been extremely poor and there are no signs of immediate reversal. With no immediate hope in either price or performance one should stay away from the issue of Plastene India Limited.

SEBI Disclaimer: – I do not intend to subscribe to the above issue.

Shares of Tribovandas Bhimji Zaveri Limited (TBZ) listed on the BSE and NSE yesterday. The company had tapped the capital markets with its IPO during the 24th and 26th of April. The price band was Rs 120-126. The company had also made an allocation of 24.99 lac shares to three anchor investors at the lower end of the price band of Rs 120. The issue overall just about managed to get subscribed with the help of friendly HNI’s who subscribed their portion 1.91 times. Retail portion remained undersubscribed and received support for 68% of their quota. The asking price was expensive and though the company is 146 years old, it by and large remains a Mumbai dominated, Western India company.

The discovered price after the 45 minute call auction was Rs 115 on the BSE. The share opened at Rs 115 and was under pressure throughout the day. The high and low on the BSE was Rs 119.80 and Rs 110 respectively. These prices were seen at the beginning of the day itself with the high happening in the pre-open session and the low within the first few minutes of trade. On the NSE the similar prices were Rs 120 as the high and Rs 110.50 as the low and again these prices happened in a similar fashion as the BSE.

The share traded under pressure throughout the day and the broad trading range was centred around Rs 112 with a movement of one rupee on either side making it a range of between Rs 111-113. The trading volume considering it is and would remain for the next nine days under trade to trade category reasonable at 24.11 lac shares. This is 14.47% of the shares issued at 166.67 lac shares. The weighted average of the day’s trade was Rs 112.29 at the BSE and Rs 112.15 at the NSE. The closing price of the share was Rs 111.20 on the BSE, a loss of Rs 8.80 or 7.33%. On the NSE the closing price was Rs 111, a loss of Rs 9 or 7.50%.

The above price chart shows the day’s trade on BSE. The trade was fairly range bound and on a low key. As mentioned before the issue was just about subscribed and was expensive compared to its listed peers offering little scope for appreciation. The markets whether one talks of the primary or secondary markets, are not in the best of health and this added to the subscription woes.

All in all the first day listing of TBZ leaves a lot to be desired. Investors who have applied will have to hold on to their shares before they are able to recover their investment price. Investors looking to enter the share now that the uncertainty of listing and the price thereafter is over should wait for some time and further weakness before entering the scrip.

The record books would say that yet another IPO, yet another listing and yet another poor show. The day when investors are happy because the issue was reasonably priced seem to be far away.

The IPO from SamvardhanaMotherson Finance Limited (SMFL) which had tapped the capital markets to raise Rs 1,665 crs was withdrawn at the end of the 3rd Day after receiving very poor response to the issue. The issue was subscribed under a fourth and almost all of the same came from QIB’s. The HNI, Retail and Shareholder portion were subscribed a mere 1% each.

What is most unfortunate is that with half the issue reserved for retail and HNI’s, this category was not wooed or explained properly what the benefits of investing in the company are.

The company held its road show in Mumbai on the 24th of April, but very inappropriately decided not to announce the price band. An analyst meet for an upcoming IPO without a price band is a meaningless exercise and it puts off people attending the event as being a waste of time. It also sends a wrong signal to the market participants that the price band is not being announced simply because the management and merchant bankers want to hide something. This could also mean that the price is unjustified and hence they want to avoid discussion on an issue which would in any case turn out be self-defeating. If the merchant bankers and promoters believed that the price was expensive and hence did not announce the same in Mumbai, they have already killed the issue even before it completed its road shows.

The secondary markets have been doing badly for some time now and the primary markets have been worse. If the markets are to be revived you need a mega issue which is reasonably priced, makes money for its investors and therefore helps in restoring confidence. There was an opportunity in SMFL to do this. Here was an issue with had size as the same was raising Rs 1,665 crs. It was from the Auto Ancillary space and if there is one sector which has done well in the last 12-15 months it is the Auto sector. There is only one other sector which has done well and that is the FMCG sector. This company is a virtual mirror image company to SMFL in the form of MothersonSumi Systems Limited and that company is in existence now for 19 years having an excellent track record. The asking price for SMFL was substantially higher than MothersonSumi and therefore the response from investors was extremely poor.

The Indian Rupee has depreciated very sharply in the last few weeks and this would have been a great advantage for foreign investors as they would have to invest fewer dollars for the same amount of Indian Rupees. One believes this issue having being withdrawn is a big blow to the primary market and it is time that promoters and merchant bankers get their act today. It is high time that they realise that pricing is the key to the success of an issue. A primary market issue has risks compared to a secondary market security. If there is an apt comparable there is no way that the primary market issue could be at a premium valuation to the secondary market.

The revival of the primary market is unfortunately in the hands of merchant bankers and promoters, and it is a tragedy that neither of them want to become lessgreedy or leave something for investors on the table so that they make some money. In such a scenario it is best for prospective investors in the primary market to shun every issue which comes to the market place until and unless it is offered real cheap. Unfortunately that day may simply not come.

SamvardhanaMotherson Finance Limited (SMFL) is tapping the capital markets with its IPO which opens on Wednesday the 2nd of May and closes on Friday the 4th of May. The issue comprises of a fresh issue of Rs 1,344 crs and an offer for sale of Rs 321 crs. The price band is Rs 113-118. The company has completed an anchor allocation of 193.06 lac shares at Rs 115.

Business
The company SMFL is in the business of providing design and manufacturing solutions mainly to the automotive industry. The company has a number of subsidiaries and joint ventures with partners in the relevant fields. The principal focus is the automotive industry and the company derives about 75% of its revenues from overseas. For the nine month period ended December 2011, the total revenue from overseas was 76.6% and from within the country was 22.5%. The company has a global footprint with presence in 25 countries and 120 manufacturing facilities. The company is the holding company for listed entity MothersonSumi Systems Limited (MSSL) where SMFL owns 36.12% share. The reported revenues for MothersonSumi in 2011 fiscal on a consolidated basis were Rs 8,371 crs and the net profit Rs 390.08 crs. The EPS for the year was Rs 10.12. In the current nine month period ended December 2011, the company has reported revenues of Rs 8,479.62 crs and a net profit of Rs 64.81 crs.

SMFL as on 31st December has 18 subsidiaries, 19 joint ventures, and 86 other consolidated entities. The group through its one listed entity and the company going public reported combined revenues of Rs 14,500 crs in the nine months ended December 2011. SMFL has acquired Peguform in November 2011 and this company reported revenues of Rs 8,107 crs in calendar year 2010. This company is a key supplier to the Volkswagen group and is located in Europe, Brazil and China.

There are two interesting angles to the Motherson group. One is every joint venture that the company or group has irrespective of the holding or interest in the JV, the management of the JV is always with Motherson. Second is, that some of the recent acquisitions have been at the behest of the customers and have been prompted and supported by the vehicle manufacturers. These two facts assure the group of continued business and support in future ventures.

The group acquired Visiocorp in 2009 and this was a turning point in the company. This acquisition helped the company prove its capability in turning around sick companies and made it a large player in the exterior rear view vision systems in the light vehicles segment and having a market share of about 22%.

The company has a diverse product portfolio and manufactures various products used in the automotive space. It supplies products like wire harness, elastomer products, rear view mirrors, cutting tools, Bus AC’s, Cabins for off-highway applications, transport refrigeration systems and so on. The company has plenty on its plate and needs to consolidate the acquisition done this year in the form of Peguform to consolidate its business.

There is one major advantage in the automobile industry where any developmental work done with a manufacturer assures the developer/vendor of assured business for that product wherever the car is manufactured globally. The auto industry particularly the premium segment is doing extremely well and one is aware of the growth in high end cars like BMW’s, Audi’s and Mercedes Benz in countries like India and China. This would be a key growth area and demand driver for SMFL going forward.

Objects of the Issue
The company’s IPO consists of a fresh issue of shares of Rs 1,344 crs and an offer for sale of Rs 321 crs. The proceeds of the fresh issue would be used for the following objects: -

Financials
SMFL owns 36.12% of listed entity MSSL. The standalone results of the company are no comparison simply because the number of subsidiaries, joint ventures and consolidated entities is huge. The company reported revenues of Rs 5,716.5 crs for the year ended March 2011 and the same in the nine months ended December 2011 has increased significantly to 6024.52 crs. The company made a net profit of Rs 192.24 crs in fiscal 11 and a net loss of Rs 152.79 crs in the nine month period. There are two one-off items which have impacted the results adversely. There was a loss on account of foreign exchange translation of Rs 70.87 crs, and transaction cost of Peguform acquisition of Rs 67.17 crs. Besides this there were start-up costs due to new facilities in Brazil and Hungary.

The company has been growing consistently and the two large acquisitions will keep the momentum going and the business growing for the next couple of years. The financials will also see improvement as Peguform business stabilises and the new units which have been set up in Brazil and Hungary are ramped up and start delivery and slowly reach capacity utilisation. The production plants of auto ancillaries have to be ready before the automobile company begins production and there is always a start-up cost incurred in the short term. The margins of the company have yet to stabilise as the business mix has changed dramatically and the additions through acquisitions have been large. The EBITDA margin in FY11 was 8.8% which had improved from the previous year’s 7.5%, In the case of net margins the same was 3.4% which had improved from 1.5% in the previous year. In the current nine month period the EBITDA margins have halved to 4.4% while the net margins have turned negative.

In terms of EPS the company had an EPS of Rs 4.06 for FY11 which translates into a PE of 27.84 times at the lower end and 29.07 times at the upper end of the price band. These ratios are on the basis of pre-money IPO and based on historical numbers for FY11. As mentioned earlier the current nine month period ended December 2011 saw net losses and there is no way that the net loss after nine months could get reversed in the last quarter.

The next year is likely to see significant growth and improvement in margins as Peguform stabilises and the new production facilities start delivering. The benefits of the Peguform acquisition would be seen in the topline from Q4 of year ending March 2012 and effect on the bottomline from Q1 of FY13. Peguform was acquired for a total value of approximately Rs 1,000 crs and loans were taken for the acquisition and also for working capital loans. The object of the issue includes repayment of Rs 966 crs of debt. This would reflect in lower interest costs and also higher margins. On a rough cut basis it would be fair to assume that the revenues of Peguform would cross the Rs 2,500 crs in a quarter and would continue to increase as the business ramps up.

Track record of Merchant Bankers

Standard Chartered Securities (India) Limited
The banker has handled one issue prior to SMFL and that was the IDR issue of Standard Chartered PLC. The issue was trading at a premium at the end of the 30th trading day after listing. The issue as of close of trading on Friday the 27th of April was trading at a discount to the issue price.

J P Morgan India Private Limited
This banker has in the last three years handled 5 issues. Of these 5 issues as many as 4 issues were trading at a premium on the 30th calendar day from listing. The situation changes completely if one takes the closing prices as of Friday the 27th of April into consideration. 4 out of five issues are trading at a discount.

Comparisons
The company has chosen to compare itself with companies like Bharat Forge Limited, Bosch Limited, Exide Industries and MothersonSumi Systems Limited. I believe the first three names are not comparable simply because the nature of business is different. Bharat Forge is more into forged components which is in no way any speciality of SMFL. Secondly Bosch is more with spark plugs, filters and components connected with the engine of automobiles. Exide Industries is more to do with storage batteries and SMFL is in no way connected with this activity. The best comparable for SMFL is MothersonSumi and these two companies have a lot in common, besides being owned and part of the same group.

The company MSSL reported an EPS of Rs 10.12 for the year ended March 2011. In the current nine months ended December 2011 there have been one time provisions on various counts of Rs 155.91 crs. I believe that the best comparison for SMFL is its own associate company MSSL and the comparison should be made with this company. The valuation of SMFL versus MSSL makes the former look expensive compared to MSSL. The key to the difference in valuation is the last two acquisitions which have been made in the form of Visiocorp and Peguform. Both these companies are multi location, across geographies and add substantially to the revenues of the company. The holding of these companies is in both the companies i.e. SMFL and MSSL and the benefit to SMFL would be larger on consolidation as it would consolidate its own revenue and bottom line and also 36.12% of MSSL.

There is confusion about the structure of ownership which is through a maze of companies that the SamvardhanaMotherson group operates. It is the same in the case of MSSL and SMFL.

Valuations
The valuation of SMFL based on an EPS of Rs 4.06 for the year ended March 2011. The PE ratio based on this EPS is 27.84 times at the lower end of the price band of Rs 113 and 29.07 times at the upper end of the price band of Rs 118. Anchor investors have put in money at Rs 115 and subscribed to shares worth Rs 222 crs. In the nine month period ended December 2011, though the company’s revenues have grown from Rs 5,716.5 crs in 12 months to 6,024.52 crs, the profit was impacted due to one off items as explained earlier. The growth in revenues on an annualised basis would be in the region of 40%. The profits would come in the year 2012-13. The asking price looks extremely expensive considering that there was a loss in the nine month period and effectively there is no PE for a loss making company.

The growth in business and opportunities in this sector seem tremendous. Consolidation in the business is happening and globally car manufacturers are looking at dealing with lesser number of vendors or partner suppliers. It is this opportunity that the Samvardhana group is exploiting.

Concerns
The biggest concern with the group is the complex structure that the company does its business through. There are as many as 18 subsidiaries, 19 joint ventures, and 86 other consolidated entities in SMFL. Secondly all new businesses are split in terms of ownership between the two companies namely SMFL and MSSL in a ratio which could be 49:51, 50:50 or 51:49. This ratio gets further skewed in favour of SMFL which owns 36.12% of MSSL which means effectively even a 50:50 split on a consolidated basis is actually 68.04:31.96. The second concern is that 75% of the revenues of the company at a consolidated basis come from outside the country. Globally currencies are extremely volatile and could cause the balance sheet to get impacted on translation losses/gains which are not a part of the regular business. This situation in terms of local to overseas ratio of sale is unlikely to change significantly in the near future due to the nature of business and the location of plants and customers. The third concern is that the group has no previous experience of turning around a sick company and whatever little experience is in the form of Visiocorp which is in the process of turnaround. The ability to successfully turn around Peguformwould be tested and the success or failure would determine the growth of SMFL.

Conclusion
There is risk in investing and with the high valuations demanded by SMFL the risk reward ratio is not in favour of the risk taker. It makes better sense to buy shares and make investment in the listed entity MSSL which has a 19 year track record. Once SMFL is listed and performs one could switch from MSSL to SMFL. At the current market price of MSSL and price band of SMFL the switch would give you 1.5 shares per share of MSSL making the investment that much more worthwhile. Very clearly it appears merchant bankers and promoters are not leaving that little bit on the table to attract investors and make investment in primary markets attractive.

SEBI Disclaimer: – I do not intend to subscribe to the above issue.

Samvardhana Motherson Finance Limited which is tapping the capital markets with its IPO completed allocation to anchor investors at a price of Rs 115 today. The IPO consists of a fresh issue of shares for Rs 1,344 crs and an offer for sale of Rs 321 crs, making a total of Rs 1,665 crs. The price band is Rs 113-118. There is a reservation of 5% of the total issue size for shareholders of MothersonSumi Limited.

The net issue would therefore be Rs 1,581.75 (1665-83.25) crs The QIB portion of the net issue is 50% and upto 30% of this allocation may be made to anchor investors. The reservation permitted was therefore Rs 237.26 crs. The allocation to anchor investors was of 1,93,06,900 shares at Rs 115, or a total of Rs 222.03 crs, implying therefore that there was a small deficit in the anchor allocation. SMFL has allotted these shares to 16 entities but of these 16 they can be easily divided into four entities namely First State Investments ICVC, IVY Pacific Opportunities Fund, Birla Sun Life and Government of Singapore. The allocation to these four entities is 35.10% to Government of Singapore, 24.77% to Birla Sunlife, 23.42% to Ivy Pacific and the balance 16.68% to First State Investments who maintain their depository account with The Royal Bank of Scotland.

The message going out from anchor investors is that within the price band they push the price towards the lower part of the band or at best midway. In the recent case of TBZ it was at the lowest price and in the case of SMFL it is a shade lower than midway.

The complete list of anchor investors is given below: -

Samvardhana Motherson Finance Limited (SMFL) is tapping the capital markets with its IPO which opens on Wednesday the 2nd of May and closes on Friday the 4th of May. The price band is Rs 113-118. The issue comprises a fresh issue of Rs 1,344 crs and an offer for sale of Rs 321 crs. The total issue size is Rs 1,665 crs. There is a reservation of 5% of the total issue for shareholders of MothersonSumi Systems Limited.

The market capitalisation of the company at the lower end of the price band would be Rs 7,016.83 crs and would be Rs 7,253.64 crs at the upper end of the price band.

There would be an anchor investor allocation being done on Monday the 30th of April and the issue would be analysed on Tuesday/Wednesday before the issue opens.