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.