Issue expensive even though it should do well in future.
SRS Limited is tapping the capital markets with its IPO in a price band of Rs 58-65. The issue is for 3.5 cr shares and would open on Tuesday the 23rd of August and close on Friday the 26th of August. The issue would raise Rs 203 crs at the top end of the price band and Rs 227.5 crs at the top end of the price band.
| Price Band | Rs 58 – Rs 65 |
| Offer size in shares | 3,50,00,000 Equity Shares |
| Issue Size | Rs 203 crs at Rs 58 to Rs 227.5 crs at Rs 65 |
| QIB’s | 1,75,00,00 Equity Shares |
| Non Institutional Investors | 52,50,000 Equity Shares |
| Retail Investors | 1,22,50,000 Equity Shares |
| Book Running Lead Manager | Karvy Investor Services Limited |
| IDBI Capital Market Services Limited | |
| SPA Merchant Bankers Limited | |
| Syndicate Members | Enam Securities Private Limited |
| SMC Global Securities Limited | |
| Hem Securities Limited | |
| Isssue Opening Date | Tuesday 23rd August |
| Isssue closing date | Friday 26th August |
| IPO Grade | ICRA grade 3/5 indicating average fundamentals |
| Paid -up Capital Pre IPO | 10,42,91,009 Equity Shares |
| Paid -up Capital Post IPO | 13,92,91,009 Equity Shares |
| Market Cap post listing | Rs 807.89 crs at lower band to Rs 905.39 crs at higher band |
| Bid Lot | 100 shares |
| Bidding Amount for Retail | 3000 shares at Rs 65 or Rs 1,95,000 per application |
Business
SRS Limited is into a number of business verticals and they are described below individually.
Cinema Exhibition – SRS Cinemas is the cinema exhibition brand under which the company operates a chain of cinemas. Currently there are 11 properties having 30 screens and 7,608 seats. The company is present in major cities of North India.
Foods and Beverages – The company operates a chain of food courts under the brand name SRS7dayz and its fine dining restaurants under the name Punjabi Haandi. Currently there are 11 food courts under operation and three fine dining restaurants operating in Faridabad, Gorakhpur and Ludhiana. The company also offers indoor and outdoor catering services through its brand SRS Banquets located in Faridabad. The company also sells packaged snack food such as namkeens, cookies and bakery products through the company’s own retail stores as well as through other retailers.
Retail and Cash & Carry – The company operates a chain of retail stores under the brand name SRSValue Bazaar that offer FMCG products, including food, and groceries, apparels, cosmetics, home care, personal care products, crockery, appliances, accessories, etc. SRS Fashion Wear is the other brand within the vertical which retails multi brand apparels. Currently the company has 23 retail stores under operation with a total floor space of 1.32 lac square feet.
Jewellery – The Company procures jewellery from its 100% subsidiary having manufacturing facility at Patparganj, New Delhi and through third parties. The company is into wholesaling and retailing of jewellery. It sells a wide range of gold and diamond jewellery under the brand name of SRS Jewels. The product portfolio consists of gold coins, necklaces, rings, pendants, bracelets, earrings, bangles etc. Skilled craftsmen are employed by SRS for the manufacture of these articles. Currently the company has three retail outlets at Delhi, Faridabad and Palwal and two wholesale outlets at ChandniChowk and Karol Bagh, both in Delhi.
The company has developed a mall known as SRS Mall at City Centre, Sector 12 Faridabad. The total built-up area of the mall is 1,38,000 square feet and has a total of 47 outlets. The company uses 15 of these outlets for its various activities.
Objects of the issue
The objects of the issue are as follows: –
| Rs in millions | |
| Setting up of Cinemas | 1011.76 |
| Setting up of food courts and restaurants | 399.51 |
| Setting up of retail stores | 536.88 |
| Setting up of jewellery manufacturing facility & jewellery retail stores | 167.04 |
| General Corporate Purposes | |
| Issue related expenses |
The company would be setting up new screens in 15 locations, with 51 screens and 13,840 seats. In the food courts and restaurants segment a total of 24 new food courts would be set up and 9 fine dining restaurants would be opened. In the retail stores format, a total of 22 value bazaars and 7 fashion wear outlets are planned to be set. In the jewellery segment besides setting up the factory in Noida, the company plans to open 17 new retail outlets from the IPO proceeds.
Very clearly the focus of the company is on increasing its retail presence significantly and as a result of this the margins which the company enjoys currently should improve significantly. Secondly the company’s focus on tier 2 and tier 3 towns will help in keeping the costs under check and help the ticket size sales or per person sales to improve and therefore margins.
The means of finance would include the IPO and a term loan of Rs 200 million sanctioned by Oriental Bank of Commerce.
Financials
The total income of the company was Rs 13,298.68 million in the year ended March 2010, which has grown to Rs 20,777.07 million in the year ended March 2011. The net profit in the same period has grown from Rs 261.57 million in March 2010 to Rs 375.12 million in March 11. The net margins have however fallen from 1.97% to 1.81%.
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The table above gives the detailed financials and also the segment breakup of sales. The dominant business is the jewellery business with 71% of the sales coming from this segment. The cash and carry vertical accounts for 26% of the sales but also include the retail stores as they are part of the same vertical. The cinema and food and beverages business do not form a significant part of the total business but have grown over the last year significantly. Sales in the cinema business have grown from Rs 218.79 million in March 2010 to Rs 368.81 million in March 2011, an increase of 68%.
Similarly the food and beverage business has grown from Rs 170.29 million in March 2010 to Rs 212.50 million in March 2011, an increase of 24.78%.
Strategy
The clear cut strategy of the company is to expand its footprints into North and Central India and leverage on the base that they have established. The bulk of the proceeds being raised are being spent to grow the retail business which has significantly higher margins than the wholesale business. The wholesale business has reached a critical mass and allows SRS to have enough bargaining power to derive maximum benefits for the customers and also ensuring decent margins for it.
Over the next 12 to 18 months the company would have significantly increased its presence across all the retail areas it operates.
| Cinema – existing 11 properties, 30 screens and 7,608 seats. New additions 15 locations, 51 screens and 13,840 seats. Total 26 properties, 81 screens and 21,448 seats. |
| Food courts – Existing 11 food courts and 3 fine dining restaurants. New addition 24 food courts and 9 fine dining restaurants. Total 35 food courts and 12 fine dining restaurants. |
| Cash & Carry – Existing 23 retail outlets. New additions 22 retail stores and 7 fashion wear outlets. Total 45 retail outlets and 7 fashion wear outlets |
| Jewellery – Existing 3 retail outlets and 2 wholesale outlets. New additions would be 17 retail outlets. Total would become 20 retail outlets and 2 wholesale outlets. It may be noted that the company is also expanding its manufacturing facility to cater to this retail capacity that is being set up. |
The focus of the business is very clearly too now concentrate on the retail segment and increase margins. The supply side has been fully tied up and is in a position to meet the needs of customers from tier 2 and tier 3 towns. The company needs to ensure that the brand SRS is leveraged and used to the fullest in areas where the same is known. If the share of retail in the overall sales goes up on the basis of substantially higher retail presence and the margins increase proportionately it would not be out of place to expect the margins to improve by almost 75-80% from the current levels in the next two years. This would reflect in significantly higher profits as the volume growth would continue as well.
Valuations
The nature of business of SRS makes the valuation a very critical and difficult thing to do. There is no company which is into the same verticals as SRS. However there are companies doing the same business as the various verticals of SRS. In the cinema business we have competitors like Cinemax and Fame India while in textile retail we have Trent. The company has chosen to compare itself with companies like Sayaji Hotels, Kamat Hotels and Sinclairs Hotels. In the jewellery segment the comparison is with Renaissance Jewellery and Thangamayil Jewellery.
The lowest valuation amongst all these verticals is given to the jewellery segment and if we were to compare with the same the asking valuation by SRS is expensive. The justification from the company side for the higher valuation is the fact that they have invested in retail in these segments and they would give significant returns as these bear fruit. The company had earned an EPS of Rs 2.69 on a fully diluted basis for the year ended March 2011. Based on the above earnings and the price band of Rs 58-65, the PE multiple is 21.56 times at the lower end and 24.16 times at the upper end. The valuations look stretched at current levels and are unlikely to provide any listing gains in the current depressed market scenario. It makes sense to watch this stock and take a call post listing and when the first one or two quarter results of the current year FY 2012 are available.
Conclusion
The company is a very diversified company involved in jewellery and cash and carry businesses which are high volume and low margin businesses. It is extending this leverage into retail and this would bear fruit in time to come, but currently the stock is expensive. Investors would do well to skip the issue currently and look at the same post listing.
SEBI Disclaimer: – I do not intend to subscribe to the above issue.
