Shirdi Industries Ltd : Braving the sentiments with an IPO

After a long time am I seeing a company braving the current slide in the market with an IPO. The past few IPOs have been quite a disaster for companies. Air Deccan's take-off in this market has been quite unsuccessful as is the same when it launched its first flight. Hope it has a better flight journey in the days to come. The others like Vigneshwara Exports tried to lower the price like Air Deccan in the hope of increasing some buying interest. Well, it had to return its money at the end. Prime focus and Allcargo all have seen some erosion in prices. However, given these conditions, Shirdi Industries defying the market comes with an IPO.

These are my thoughts on this company....They are personal views and I do hope it is able to raise its money successfully.

• Size of the IPO 44-50 crores
• The issue will be open from the 29th of June to the 05th of July.
• The company was incorporated in 1993 and the company is planning the current issue for manufacturing MDF and particle boards, flooring, door skins, laminates and door and furniture components

About the Company
The company was incorporated in 93 and primarily dealt with trading of forward sell options. Later, the company started to import raw materials from south east Asia and sold it under the ASIS brand. The current issue deals with this segment to increase its capacity in the manufacturing segment.

• The company is in B2B and mainly uses its dealership to induce sales. Discount may hamper margins and also cash flow. The details on the cash flows has been dealt in the later section.
• Sales is limited to a few states. The IPO does not talk of strengthening the distribution set-up, which I think is crucial to develop business in the long run.
• Internal competition is mainly from local, un-organised sector. The plywood industry has seen a few closures due to unhygenic practices.
• China is the largest producer of this company's product of MDF. The growth of this segment by China is around 40% while India's production increased by 2%. In the hard board, India manufactures 10% of Chinese production. Hence, any entrants of Chinese products will lead to a price war. India manufactures 0.4% of Chinese production.

Balance Sheet and Profit and Loss

A look into the manufacturing division of the company is revealing some startling results. The company seems to have done well in this divison. The company sales has increased from 80 crores to around 1300 crores last year. If you see the improvement in bottom-line, this comes to around 30% net margins (the assumption is that trading sales has a margin of 10%, other incomes and consultancy at 100%)

• The ROE is around 11% as of last year. However, a significant portion of this ROE is from the manufacturing division. The ROE has improved from 2% to the current level
• The ROCE, a better indicator of the business is also at similar levels of approximately 10%. This margin has moved from 8.5% last year

Depreciation seems to have been understated. The company has added 52 crores of assets last year, a 5 time increase in assets. However, the depreciation provision has increased only 35%. This can be possible only if the company has made substantial acquisition in land.

The cash flows of the company has been varied and strictly nothing conclusive is coming out of it. While the company has achieved a strong cash flow for the current year, the cash flows was negative on three of the five years. Also, the increase for the current year has been mainly on account of increase in creditors and the company has consistently increased its debtors over the years.

Capital Structure

Again, yet another disappointing capital structure for the company. The promoters have acquired the shares at around Rs.11. The company has made an allotment to a foreign company at around Rs. 53.84. With the euro currently at around Rs. 58, and the issue price at around Rs. 69-78, this company has got an exit option with about 18% profit in a year. Infact, the lock in period on this investment by this foreign company has just come to an end for 85% of its investment. Anyway, given that the promoters have made an excellent deal in this company, at buying it extremely cheap, its now time for the public to understand if this pricing is correctly valued.

The current issue has some interesting facts:
The company needs Rs.127 crores for its funding requirements. Of the 127 the company has already tied in funds of approximately Rs.87 crores. The remaining 40 crores is coming from this IPO. At current issue price of Rs. 69 the company is expected to raise 44 crores, giving it a margin of Rs. 4 crores. Well, that is around 10% higher than the company requirements. Will we see a reduction of price due to poor market conditions?

Investment Positives
The only positive that I saw in this company was the strength of the new business. The new business seems to have strong earnings potential given the sector of housing is seeing strong growth. The company has a strong pricing power given the margins on the business.

Investment Negatives

• The company has not paid any dividends since 1998.
• Company has entered into various businesses such as in finance companies, reality, and biotech. The group companies, especially one of them Poona Pearl Biotek has shown a 16 times increase in losses last year
• Current networth is 38 crores and the company is raising close to 44-50 crores in this issue
• The issue is two and a half times the current book value of the share and the promoters have acquired the shares at half this price
• Legal Proceedings against the company's directors are a bit hazy. The promoters are being sued for acting on personal interests. Though the claims are on the lower side, it still raises doubt on the management.
• The current earnings is at Rs.2.4 and even at the lower end the pricing of the issue will be at 28 times its current earnings. As a relatively unknown brand for the public, I personally believe this to be on the higher side.

Others:

• Though the lead managers has fallen to Allianz Securities, Edelweiss Securities seems to have taken the onus of selling the issue to the market. 50% of the issue is being underwritten by this company.
• The MOA has a whole paragraph of more than 15 lines on IT and the scope of operations it can undertake. This comes as a surprise, as it is the first time that you will hear IT from the company. The sales figures, does not indicate any revenues from this stream
• The promoters group companies are a big question on sustainability. A host of companies, pretty closely held. Most of them are showing high variability in sales across years. While this is does not impact the company directly, however, a company that has not paid dividend in the past five years, and the promoters having a clutch of companies with high volatility in sales, does not ring the right bell.
• The salary earned by directors are unnecessarily confusing. The perks are close to 2.5 times the salary being earned. At first glance, it looks like the company is paying only Rs. 35000 for the promoters every month. However, once you add all the perks it increases to around 1.15 lakhs on the lower side.
• The company seems to be quite sure that the price change could be possible as it has marked this sentence in bold that the change shall by duly intimated to the exchanges.

Given the above information, I personally believe that this IPO can be passed and the investor rather have his money invested in the direct market. However, these are only my personal observations.

India - Arcelor and Mittal

Business Standard was covering an opinion poll today and the question was whether Arcelor Mittal combine will help India. He had given a yes/no as his options. Now, this was interesting and I was trying what it could be. Arcelor has no known presence in India. Mittal, atleast has given his word to invest in a 12 mln plant. However, his presence in India, considering he is an Indian, is pretty disappointing as he waited till last year to invest in India.

India currently produces around 1/3rd of the combine capacity of this merger. Around 35 odd million. The entire country! Arcelor produces more money than Mittal but the latter produces more steel. So what am I being an Indian going to get any benefit? The big guns of India with Tata, Sail, Jindal all produce steel and their exports aren't that great, compared to this giant combine. Tata produces one of the lowest cost steel in the world and Sail and Jindal seem to have done some decent work, inspite of being one being a PSU and the other was almost a sick company.

I am just not able to understand how this deal is going to affect India.

• Are we going to get better deal on prices?
• Is he going to manufacture something else that is on the higher end of the value chain in India, post this merger?
• Will he stop his plans in India, now that he is got some incremental capacity in his kitty (close to 10% of the world production) and also considering that we have a government that is unclear on its policies?

I would not be surprised if the third happens as the government enjoys giving a decision and taking it back. The airport contracts, the SEZ issues on land requirements etc...

None of the above questions gets me a conclusive answer, but yet the results from the other readers was overwhelming 'yes'. I wanted an answer that had the option like - 'I am ignorant and hence inconclusive'. One thing that hit me immediately is that we like Indians to perform well and we back them for no apparent reason. Sania Mirza, Indian cricket, Arun Jain, Bobby Jindal, Vinod Khosla, the many known in US and the even more unknowns who are successful in other countries. W e support them as if they are here to help us move out of this rut with their achievements, but rarely we see that happen. We just sit back and applaud and have an empty happiness. Again, its a feeling that they will come and help us, because they have achieved. We, as Indians, must support, after all, he is an Indian.

Am I missing something that the others seem to have seen and possibly in plain sight?

Should the RBI hike Interest Rates

For the past few days, I have been tormented with this problem if it makes sense for the RBI to raise interest rates. Here, I am not talking of repo or reverse repo rather the CRR. I was quite surprised to see the rates hiked without notice to anyone. It caught everyone off-guard. It's sometime nice to see the power of RBI. Completely, neutral to government pressures. Even surprised to see the markets to have rallied the next day as I thought it was not a positive information for the markets to discount. Well, the markets have not been always rational.

The Fed has been hiking its interest rates over the past few years and its now reaching a level where the markets are increasingly jittery. At 5.25% we are at a all time high. It is increasingly removing money from Asian markets, which was largely leveraged from these countries. Also I don't know if he will be able to control inflation with this hike. The brunt of the fuel hike will cause further damage to inflation. However this is supply driven and demand driven. Our consumption of amount of fuel has remained more or less constant across two years. This could be important as one will not be able to change his consumption pattern too much because of this hike. He may reduce it, but the extent will be relatively small. Given this scenario, should India hike its interest rates. I have some thoughts on it.

• Capital is increasingly required in most of the industrial sectors. Most companies have announced their plans to expand or currently in expansion. As we have a largely under-leveraged companies, they have been borrowing quite extensively from the markets or banks. So, it is going to affect their profitability. I however, doubt if these companies will curtail their investment decisions or defer them for sometime till they have some clarity. It is obvious that the world over interest rates are hardening, and hence makes sense for them to have their expansion plans at these rates, than later.
• To a certain extent, we are handicapped to world interest rates. I don't deny that. I feel this rate hike has taken the speculative money and will increasing pressurize good money that can be spent as FDI to move out and Reddy wanted to prevent that by giving hints in the air. As I do not know our ECB completely, apart from what keeps popping in ET, my guess is that we still are not in the area of concern.
  
• Being a capital hungry economy and the projects lined up in infrastructure being huge till 2012, the governor should be more interested in the areas of lending rather than the rate at which it is being lent. RBI forced banks to increase the provisioning for house loans, which in my sense was a good move as it changed plans for the banks to shift priorities
  
• Directive lending should be bought back in place to ensure money is sent to the right sector. Now, here I do not want them to invest in agriculture, coz this sector is hardly growing and increasingly the money does not seem to reach the end consumer. However, with the kind of efforts that is being put in by ITC, Reliance, Bharti, HLL, Godrej, I personally believe money can be used elsewhere.
• Money can be specifically spent on building effective roads, airports, sea-ports and railways.
• Money can be spent on power. Somehow, the pace can be improved. With lending made aggressive, this can be done
• Money needs to be spent in having clean water, education etc. as these will help the country in the long run

Given this picture, I don't think interest rate hike will affect us immediately but I hope he does not hike the core interest rates as it start creating the fear of building expectation of hiking interest rates, which an even more danger to the system.

SREI Infrastructure - A must buy

The reason for my posting some companies in my blogs is just to re-inforce myself if I was right in making a purchase of shares. After this crash, it makes sense for an investor to be a critic and understand if staying with the company makes sense. The recent fall in the share market has given tremendous opportunities for investors to look at his portfolio and make adjustments to them. Surely, the crash would have left most of us wounded with huge losses, but I believe this crash giving an ideal entry to companies that one missed in the previous rally. The rally gave hints of companies that have the potential to be better than the others, but have fallen as there no buyers and speculators have left them in the lurch. Ideal long term investors need to grab them and have the next round of gains.

I enjoy infrastructure based companies as it is not heavily dependent on outside economies. Most of these companies undertake projects for the development of our country. The only risk being whether such investments will yield the desired returns. Peter Lynch did well in the 80s investing in companies that focused on infrastructure. If I recall correctly, he did a 5 bagger in most of these companies. His reason was extremely simple. These companies do a big service to give the country the next level of growth. However, these companies will stop showing growth after the country has become a developed one simply because consumption can be easily monitored. You are not going to spend more on electricity just because you have more money. You probably will travel more-but the facilities that you need from the road, ports or in airports will become predictable and further investments into these areas would only enhance comfort marginally. Well, we are a long way off. We hardly have continuous power, decent roads to travel, excessively used airports created by the low fare airlines. So creating the opportunity for all companies in this sector to grow and grow much faster. I do not know if they would grow at a pace greater than the other sectors, but I am atleast confident on the government's commitment to improve basic necessities that is much needed for us. Hence this post and possibly more on these type of companies.

The main problem that I encountered in this sector is the investment that one needs to make. Companies that are in IT, Entertainment etc rely heavily on manpower. Unlike infrastructure, where companies consume massive capital, these sectors hardly have such requirement. Any deal with proper pricing can ensure reasonable amount of safety for the return of capital. Infrastructure based companies run a risk on this. They consume capital and you do not know if they will make money. The projects have a huge gestation period and have leveraged balance sheets. Small changes in interest rates is sufficient to make the project infeasible after a few years. I am bullish on the country and hence I believe that I am making the right sense of investing in these companies.

I shall be posting my views on a series of infrastructure based companies in the next few posts of mine, if I have sufficient time at my disposal. My objective is to try and make sense in the policies of these companies.

SREI Infrastructure could probably be one such company that falls in this segment. The company gave up its highs of around Rs. 80 from around a month back to the lows of Rs. 30 today. That is one mammoth fall for a company that is doing pretty well. A company with a slightly different objective. They are into lending and only to infrastructure based companies. I read their annual report, and a truly interesting one. Very colorful (the company is in a purple patch), loads of explanation of the core activities of the company, extensive information on the industry (it probably took half of the report, which is a good one). Currently trading at a PE of 7. Imagine. Why are people not investing then? The company at its peak was trading at about PE of 18. Capital and infrastructure based companies were literally murdered in this crash. Probably that is why it is trading at such levels.

Company is primarily involved in these segments

• Equipment financing
• Equipment leasing
• Infrastructure Project financing
• Projects that are based on renewable resources (extremely small but amplified in the report)

Company has some diversification, of which some looks unnecessary in

• Capital Markets-generated marginal revenues, not making operating profits mainly due to increase in debtors
• Forex Services-generated about 2 lakhs of profits, not generating operating profits
• Insurance-loss making division and again not making operating profits and is moving into securitisation and asset reconstruction. Has created a new company that has a general license to market all insurance in one window. Company seems to have made some heavy initial investment not in assets, as the only asset they have is a computer. Sustainability in this seems to have some attractiveness as there is some synergies in business, especially in the non-life insurance sector.
• Venture capital-looks promising but details of this company is a bit sketchy. The company is investing in infrastructure based companies in the SME segment. The profitability that the company has shown is impressive. The salary in the P/L gives an indication that there are not more than a few individuals, and that too in the lower rungs of the company
• Retail Financial Services-made some huge investments in infrastructure, but the segment is highly competitive with banks being the market leaders. It is difficult for the company to position itself unless some clear differentiation can be created by the company.

Investment Positives

• Paison Ki Nilami-reverse Auction - a concept of reverse auctioning on determining interest rates.
  
• Direct bulk purchase of equipments from companies like Tata, Ingresoll Rand and ensuring their availability to its clients at cheaper prices. This fends off competition especially from the banking sector as their cost of borrowing is significantly lower. However, they would not purchase assets for lending them as leases. This activity has to be done by these companies.
  
• Listed on the LSE-can be more transparent in its accounts
• Its presence across the finance vertical, its expertise in consultancy, its reach
• Good dividend yield at current levels. At 15% dividend declared last year, the yield is about 4-4.5%. We have seen the upside on this stock a few weeks back.
  
• The company has done well in terms of customising its receipts with the cash flows of its client and has done well on the NPA front. Its capital adequacy ratio is well above the prescribed limit of 12%.
  
• The company uses securitisation of its assets, buys from ARC's (can get at a decent price) to ensure lower costs are maintained.
• The sales growth in its key areas are well above 30% and with more infrastructure based projects in pipeline and a capital starved country, the company should be able to maintain these growth levels for a certain period of time.
  

Investment Negatives

• Heavily dependent on the condition of the economy and the pace at which government will announce its projects
  
• Road projects are sometimes not viable investments. Any hardening of the interest rates can affect the project
• Raising money for projects- Rating of the company is not attractive. It is at AA-, which is a comfortable 200 bps from a bank. This benefit will affect the company as competition from banks is bound to get fierce.
  
• The other segments that the company is concentrating will give poor returns
• The company has a corpus of only 2200 crores
• There is a constant hint in the annual report that the company is not able to deliver its equipments on time due to non-availability. It seems to have mitigated thru bulk purchases.
• Interest Coverage ratio of less than 2 is a big risk in a rising interest rate scenario. The company's debt equity ratio is frightening given the fact that the company seems to borrow quite extensively (close to 6) and the borrowing mix is heavily tilted towards term loans from banks and financial institutions

Overall, the company has shown promise and the report that I spent reading for more than 3 hours was well spent. I truly believe the price of this stock to bounce back and show better appreciation in the years to come. More updates shall be posted when required.

Transfering Assets-Yet again is it fair?

Company	PRITISH NANDY COMMUNICATIONS LTD.
NSE Symbol	PNC
Announcement	Pritish Nandy Communications Ltd. has informed the Exchange that the Company has received a letter from Reliance Capital Asset Management Limited, a body corporate that pursuant to an inter-scheme transfer on June 05, 2006 from Reliance Growth Fund holding 9,00,000 Shares of the Company constituting 8.5985% of the paid up capital of the Company to Reliance Media & Entertainment Fund, there has been a change in shareholder, but the percentage holding by Reliance Mutual Fund i.e. 8.5985% remains unchanged.

The above mentioned was in the communications sections today. I found this piece interesting. It is a normal practice for mutual funds to shift assets from one scheme to another, so ideally this should not have created any panic to the investor. However, some interesting facts :-

• Sales of this company is extremely volatile. It was down from around 40 crores to 30 crores to back to 34-35 crores in the past three years.
• The share is trading at close to a year low. Has participated in the downside quite well
• Reliance Growth Fund is a flagship fund of the company and there is always pressure to perform constantly. The Media fund is less focussed than the hugely acclaimed Growth fund, creating pressure to perform.
• The Growth fund is completely transferring all its assets to the media fund. Total assets of the scheme : 2800 crores. Transferred money of this company : 3 crores. Not much to show any impact.
• Volumes are low in the market and this company is facing resistance at higher levels with huge 'sell' orders. Hence any share sold is further going to dampen sentiments on the stock
  

Yet the fund is doing it. Now what could be the reason? I just was thinking if this is the way wherein the fund is revamping its portfolio by transferring assets to other funds that are not that noticeable and can always be blaimed on markets of these companies specifically (one can say media companies, in general, have not performed) Just a wild guess.... but then I do not know. If it is so, then it is a disappointment from the fund house as the company is passing the buck of losers to these funds wherein the investors are forced to take the loss. Though the existing shareholders have not gained anything from this transaction, it gives the fund, the much needed liquidity to invest in stocks that have better potential to grow. It is similar to accepting the losses and taking fresh positions, but only this time it is at the cost of the other fund, infact their own fund.

All this could just be an imagination from my side, cynical of such a transfer. As mentioned previously, this happens most of the time in mutual funds. I just took this case to mention how this is applicable to save one's face in the worst of times.

Report on Annual Reports

The recent crash in the market has led to fewer IPO's reducing my workload. That was bound to happen. How long can we keep funding an unreasonable growth in the stock market. Someone's got to lose. Well, if not for anyone, I surely did. However, when I did ask a few of my friends if they lost money, I surely heard two reasons. I am there for the long term and this is a temporary correction long awaited and secondly, the long term story of the country is still intact. For the stock to move upwards, there should be a buyer who can find value once we reach back previous highs. I do not know who is that going to be. and as usual time will surely tell.

So what is exciting in these markets. My holidays gave me a huge list of annual reports to catch up on. I enjoy reading annual reports. It is like reading a prospectus. A lot of repitition making it complex and boring to read. If there is some regulation that requires repetition, then its high time the law some change. Endless repitition of the best performance and silently ignoring the important signs. As a shareholder, even if it means a single share, I get to read the important stuff of the company. It is true that the company incurs more cost to maintain a single shareholder, but then every shareholder has the right to be informed. This time around, till I see an IPO in the pipeline, I shall comment on the shareholders report and my observation on them.

I think it is important for every shareholder to read the annual reports. It probably gives insights to the company that one would have never thought of. For example on the recent budget proposal on ultra power projects. We get information that India is building 4-5 ultra power projects. One sees the shortfall in generation at about 75000 MVA. Now what do I understand by this. Can Reliance actually bid for this...does it have the competency to bid...no idea. Reading the reports, esp annual reports gives indication if the company has the capability to implement. Btw, for information the company only generated around 1000 MVA for the last financial year. The total generated in the country was 125 times his generation. Surprised, yeah so was I as Reliance always advertised as though it was the largest producer. It still is, but the scale is just not comparable. Public utility companies are far ahead in power generation. The annual report from the company was equally disappointing. There was no symbol of the newly formed ADAG symbol. Though I am not a big admirer of the symbol, yet it is a signature of the company and this was missing.

The report from Anil Ambani is always good to read. Somehow, though I do not know him personally, I like what he says. Comes out as a person who is truthfully and likes doing things within the constraints of the law, wherever applicable. The company actually has not done that well this year. The sales has been on the lower side. The company has reached its limits in capacity and incremental sales has to come from expansion. The company's foray in wind is disappointing and natural gas has had no buyers. No wonder he has not advertised this in his report. The company has revalued its assets. This could have been due to the de-merger between the two brothers. I hope this was the reason as I do not like companies revaluing assets upwards, esp. during boom markets, as they are not going to devalue once the market is down. The company has not charged the depreciation due to this upward revaluation on the profit and loss directly. They have used their reserves to make up the higher cost. This again is something unacceptable, revaluation is similar to having bought the asset that year. They should have charged it to the income statement directly without using the reserves. I understand the company has not done anything wrong, just that it is unfair to the shareholder. Next, on the company's general, distribution, administration expenses- the investment to the gratuity fund dropped dramatically. Could find no reason as the company had a slightly higher salary expenditure. The company should be completing its merger with Reliance Energy Ventures this year. Should this create an impact to the company? I do not have an answer as I am not clear of the shareholding pattern of the company. My ideal guess is that it would not have an impact but to be certain I need to know the shareholding pattern of the company and the extent of impact of this shell company.

Finally, I am definitely interested in this company for the following reasons. I am bullish on infrastructure based companies. Reliance energy has got approvals to build over 12500 MVA over the next few years. The investment should roughly be in the range of about 50000 crores. The company has reserves less than 10%. So, the company will be borrowing and given its credit rating, this should be easy. However, I will be concerned if dilution occurs due to FCCB, as they can demand steep discounts. I like the aggressiveness of the management. There is a definite hunger for success. The company has got Anil Ambani, and he too is like his brother in thinking big projects. The best of this team is that this is in a sector with huge opportunity of success. Growth will taper off in a decade but utility companies are as the name suggest- a requirement that can't be reduced.

The next one that I read was on Gail. I have been investing in this stock for a long while and I finally took the pains to read their annual report. Unlike the report by Reliance Energy, this was comparatively attractive to look at. This can be both negative or positive. Negative as the company is spending on something that is hardly read and positive as the company is proud. My take on this is that, the company ought to make it attractive as this is a PR material for the company and it is important for the company's management to be proud of its results. It does not have to be lavish yet a little bit of shades should do no harm. Coming to GAIL, the company is an ideal company with immense potential to grow. It is in the oil sector, yet the company makes investment on communication lines, which is irrelevant. You will see this getting disinvested or floated into a separate company soon. I am not happy with their investment. I do not see the synergies of business apart from the gosling that they are using for building them. It reminds me of a famous quote by Mark Twain- There are two times when a man must not speculate: One when he has money and the other when he does not. This looks like speculation with money to me. The company otherwise is making some good moves in investing in local bodies for distribution of CNG and LNG. The company still generates 70% of its revenues from its core sector of selling gas. Here is something funny. The company's vision is to ensure value is created to all stakeholders yet it takes pain to reiterate by giving importance again to environment and customers. My guess is that they do not believe these two as a part of their stakeholders. Its part time directors is a total disappointment. Two directors have attended just one of the 15, the best being 10 attended by another director. Wonder what value they add in that one meeting that they attend.

About 23 giving an PE of about 10. Ideal for a company with ROIC of over 27%. The company is suffering from the subsidy burden. It had to pick up a tab of about 1100 crores translating to about Rs. 13 per share. Well, one is helpless of the atrocities of government policies even if they are going to get something back in the form of Oil Bonds. Anyways, the company is in the right sector and the supplies that it is making to the power sector and for local consumption gives this company an ideal candidate for investment. It is still a govt defined pricing sector, and my faith of the current government is losing over the past few months. Yet I would like to invest in this company.

Declare Dividends by borrowing-Unfair

Something struck quite unique to me in the recent bonds raised by these oil companies. All of them cited losses if not for these bonds. They showed the receipts of bonds as normal sales. Borrowing of this money by the government as SALES. How can you do it. To top this, they have shown profits in their books and to further aggravate this they have DECLARED DIVIDENDS and the government has coolly taken this money what it gave to them in the first place. The government has borrowed money and distributed this money as dividends, when in reality they have been running losses and have asked ONGC, the scapegoat to bear the losses, as how much can the govt. bear. I have, for long, invested in ONGC as it was one decent company heading somewhere. Today, because of the government, I am forced to share my profits to not only these refining companies but to the entire nation. Just look at it this way. The government raises money from the public, thus raising its deficit. This is a long term borrowing to fund annual shortfall. First mistake funding short term losses with long term funds. Second, receiving dividends from these companies. Why are we borrowing more and receiving dividends and thus showing income in your GDP. This is wrong as you saying that raising capital is SALES. Though most of the dividends it received from this decalaratin by companies is small compared to the overall GDP, I still feel that the entry for this transaction must not be recorded in the books as dividends. There ought to be an alternative such as a book entry for the bonds received for the year and the excess or defecits charged to it rather than to the profit and loss account, where the government gets unfair benefits, (in taxation of profits and dividends received post taxation).

Well, my interest in this government seems to be falling apart for the past few months. There seems to be a lack of proper forecasting like its predecessor-the BJP. Inspite of their current shortcomings, BJP still has a few sound people which I am not seeing in this governemnt. Critical issues being held at gun point by the LEFT and failure to take the RIGHT choices, is keeping this government heading nowhere. We are lucky that this party is spending on infrastructure, else we might be in doldrums.

Vigneshwara Exports Limited - Another IPO

Well it looks like the stock markets just loves to see an IPO every week. So next in line is this company. The company is based out of Mumbai and the office is in Parel, a place where I was staying for two months. However, the place has seen tremendous appreciation of land value, but as this place is only the registered address and also since I have not seen the place I shall not comment on it. Anyways, coming to the IPO, the issue has been priced between Rs.121 and Rs.140. The IPO looks to gather around 50-60 crores from the market. Compared to the previous issues from ICICI, ONGC and possibly the DLF issue, this looks like it will hardly have any impact on the market and will comfortably sale through even the company does not advertise in the market.

This issue is not fraught without risks.

First, that comes to my mind is the promoters stake. The promoters are diluting their stake in the company to below 50%. I do not understand the reason for such a drastic step for the company.

Second, the company was into diamond trading for the past five years. Post this issue the company is planning to exit from this business. Now, that is something that needs attention. The company has entered into a field where the competition is already on the higher side creating heavy pricing issues. This should have been forecasted before entering. However, the company seems to have taken the poison pill and have decided to move from it.

Third, VEL is getting regular business from existing customers. Its top 5 clients have account for more than 75% of the business. Though this has been reducing over the past few years, this is one factor that I would be keen to looking at during the coming few quarters of the company. The company is a regular in a show in Germany for the past 15 years but it has not been able to increase its customer base for these many years. One should give this some thought.

Fourth, the company's pricing policy without using LC. As far as the customer is a regular for the company, this strategy works fine, else one would consider the risk for non-payment.

Fifth, the company's capital structure-post 2003, the company has changed the capital structure 7 times by bringing in fresh capital. However, the company has always issued the capital at extremely low cost to the promoters. Till 2005, the company issued at Rs.60 to the promoters. This was increased to Rs.100 in a month. I have no reason why things changed dramatically in a span of couple of months. The promoter will actually double his returns on his investment made last year. However, if one looks at the issue, the company has issued to the promoters at about 6-8 times earnings. Sometimes, I do wonder, if it right for the promoters to have issued the shares at such low prices when he knows that he has the option to dilute his stake when he brings his company to the public. Finally, a small irrelevant issue, the company's prospectus was mostly referring to the opportunity in US when it hardly has operations in that country. The company only has plans to enter into this market after the issue.

Positives

While we have spent our time on the negatives of the company, here's the brighter side. The company has been growing aggressively. Assets have grown by more than 14%. Inventories though has been a problem with certain years of poor forecasting, but the company has increased its sales by more than 150% in the past five years. The company has a CAPEX of 200 crores in the next few years and have lined up their capital. The company is making use of the Technology Upgradation Fund provided by the government. The rest is being funded by the IPO which is expected to raised about 55-63 crores. However, the company has sales of around 1200 crores for the past couple of years. I like the industries' prospectus with immense potential to grow.

Neutral

The company's capacity utilization has been below expectation and the bottlenecks seems to have created the problem which is being addressed with the cash inflows from the IPO. The company is increasing reliant on external supplies for its raw materials. Though this will be reduced by the IPO, this still is a concern that should be addressed by the company. The company's will be investing in heavy machinery. Hence the company should see a higher tax benefit and some security to the cash flows. The company has faced problems in dispatching within deadlines. With no cover from LC, one needs to know if there could be some risk. Power will be a concern for the company but the company seems to have addressed this issue-by hoping the government will provide with the necessary fuel.

I still am not quite clear if this company will provide the necessary appreciation that one is looking at. The cash flows which still hits me constantly is the main source of concern. However, I do hope the company will be able to manage the cash flows better. Also, the company's pricing policy at Rs.121 - Rs.140 will make it expensive today when compared to its peers. But Invest thinking of the future of the industry.