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.

Plastene India Limited Issue withdrawn

May seems to be a difficult month for MotilalOswal. In May 2011 Galaxy Surfactants was withdrawn and in May 2012, Plastene India has been withdrawn. The company was tapping the capital markets with its issue for 92.55 lac shares in a price band of Rs 81-84. The issue was open for 5 working days from 9th May till 15th May. The company received a total subscription of 26.45 lac shares or 29% of the issue size. The breakup of the subscription shows that there was not even a single bid from QIB’s while Retail bidders chipped in with 5% of their quota. The encouraging response was from HNI’s who subscribed to 24.29 lac shares or 1.76 times their quota.

What went wrong? Is it just the May factor or a mere coincidence?

The problem is the same in both issues; OVERPRICING. Plastene India limited which had a price band of Rs 81-84 demanded a PE multiple of 23.62 times at the lower end of the price band and 24.50 times at the upper end of the price band. The net margins of the company were a mere 2.69% and have fallen significantly compared to last year. The net profit in March 2011 was Rs 21.23 crs which in ten months ended January 2012 has fallen to Rs 10.12 crs. The greed of promoters and merchant bankers in over pricing issues is simply killing the primary markets. The right price is something which these people need to learn. If competition with almost double the margin is available cheaper, why would one want to invest in such a new company?

Intermediaries must realise that times have changed. Gone are the days when grey market premiums and only hype were enough to sell issues. The first day listing norms change has reduced volatility and traded volumes which used to be between 10-20 times of IPO size and are now between 15-20% of IPO size, a drop to 1/50th of the volume. It is now time that pricing should be more clearly understood and debated and there be enough left on the table for investors.

To add insult to injury, one hears of the fact that while road shows to market the company were held in Ahmedabad and Rajkot, the same was not done in Mumbai. Indeed surprising as almost all broking houses have their research departments in Mumbai and good or bad, reports if any would typically come from Mumbai. Therefore any company coming out with an IPO not wanting to do a road show in Mumbai is inexplicable.

There are now two back to back disasters for the merchant banker and also almost for the market as well. The recent issue from SamvardhanaMotherson Finance Limited was yet another case in point where the price caused the downfall of the issue and was subsequently withdrawn. Actually calendar year 2012 began on a wrong note with Goodwill Hospital being the first issue of the year to open, and it was withdrawn. The track record for the current year shows that 3 issues have been withdrawn so far and the total number of issues that have been subscribed is just 5. The record so far is simply pathetic.

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: -

In the issue analysis on the company done yesterday it was erroneously mentioned that the issue closes on Monday the 14th of May. The error is sincerely regretted.

The status of applications received as at the end of Monday 14th May is given below.

The change over the second last day is 2% and the company needs to garner all its resources to get the issue subscribed. QIB’s look unlikely to subscribe so it would become imperative that HNI’s get the required subscription to get the issue through. There would be complete clarity by the time the bidding closes at 5 pm today.

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.

Budget 2012-13 introduced the General Anti Avoidance Rule (GAAR). The finance minister managed to resolve the issue to a large extent, but Mauritius would no longer be a tax haven for doing business in India.

In his reply to the discussion on the Finance Bill, Pranab Mukherjee extended implementation of the GAAR to the next financial year. He also clarified it would not be applicable retrospectively, adding the onus of proving tax avoidance would be on the income tax department and not on the assessee. The clarification has helped sooth ruffled feathers, but it looks like the Mauritian route is no longer likely to find favour with foreign institutional investors (FIIs). Hence, it would be appropriate to say, “Mauritius, rest in peace”.

Is GAAR unique to India? No. A large number of countries have it. Australia has it since 1981, Canada 1988 and South Africa 2006, while China introduced it in 2008. Though the US and the UK do not have specific laws on GAAR, they have enough restrictions and safeguards to ensure payment of taxes.

India is a growing economy and cannot survive by being a tax haven. It needs to tax transactions, widen the tax base and ensure stricter compliance if it has to continue to grow at seven per cent or more.

The opposition to GAAR and its implementation basically stemmed from a couple of facts. With these being addressed, this issue will cool off in the 10 to 11 months between now and implementation. The primary concern was the retrospective nature of the Act, which could have gone to extremes. The I-T department could challenge companies which received tax breaks in certain investment-encouraging states like Himachal Pradesh, Uttarakhand and those in the North East. Second, with one eye on portfolio investments and the other on the fiscal deficit, we heard conflicting views that participatory notes would not be taxed while brokers issuing these would be. This confusion caused FIIs to liquidate positions and shift from Mauritius to Singapore. With the clarifications, it is now clear that Mauritius is no longer a good choice. The extension till April 2013 gives ample time for funds to relocate, without much impact on cost.

The effect of this legislation on GAAR will have far-reaching implications. The importance of India in the future because of our population, growth and consumption story will remain attractive and encourage foreign direct investment. If India’s tax laws become clearer, investors with longer horizons would come to the country, rather than portfolio investors who generally are around for the short term. The global currency volatility and rupee weakness make earning returns much more difficult. And, with some tax to be paid, would make those institutions having at least a medium-term horizon invest in India. This would also help reduce stock market volatility.

I believe giving a year’s time to digest the rules and assuring no retrospective amendment(s) and putting the onus of proving avoidance on the department will make GAAR meaningful. It will ensure better tax compliance and less litigation. The icing on the cake would be stable markets, as short-term foreign players would look for greener pastures elsewhere.

business standard article published today 110512