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Sai Silks (Kala Mandir) IPO Review

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Issue Highlights
:
Price band
Rs. 70-75
Lot Size
200 equity shares
Maximum Retail Subscription
Rs. 1,95,000 or 13 lots
Issue Period
11/2/2013-13/2/2013
Issue Type
100 % Book Building
Face Value
Rs. 10
Issue Size
89 crore
Registrar
Bigshare services Pvt. Ltd.

Company Profile

‘Sai silks’ was originally started as a partnership firm and was later converted into a public limited company. The company is involved in the retailing of sarees  (under the brand names- Kalamandir, Mandir and Varmahalakshmi),women’s dress material, men’s wear, kid’s wear and gold jewellery.
The company is also involved in electricity generation using wind power project with a capacity of 2 MW in Kurnool district of Andhra Pradesh.

Safety Net Feature of this issue:  Simply put, if  market value of Kalamandir shares fall below the issue price within six months of the allotment, promoters shall buy originally allotted shares from  the resident retail investors with a cap of 1,000 shares.

Concerns

·         This business requires high working capital and this is the sole purpose of the issue
·         Corporate governance issues like FEMA violation charges, IT & gratuity liabilities are worrysome
·         Negative cash flow from operations was seen in the past

Objects of the Issue

·         Setting up of retail outlets: Rs. 12.73 crore
·         Brand promotion expenses: Rs. 8.5 crore
·         Pre-payment of term loan: Rs.: Rs. 90 lakh
·         Working capital requirement: Rs. 60 crore
·         Issue expenses: NA

·          
Financial Profile #

# Post-issue equity considered for the calculation of EPS and BV

Parameter
FY 13 Annualized
EPS
Rs.6.5
P/E
11.5
P/B
2.9
ROE
25.7 %
NPM
4%
Profit CAGR (5 years)
66%
Debt-equity ratio(pre-equity)
4.5

Inference

Though profit CAGR and ROE may seem tempting but this issue leaves no stone unaltered to spook investors. The pre-equity Debt-equity ratio of 4.5 emphasizes the need for floating this issue besides working-capital requirement. But what is interesting to see is only Rs. 90 lakh out of this Rs. 89-crore issue shall be allocated for the debt repayment!
And the reason for the aforesaid is-A company with a network of just Rs. 54.65 crore is raising Rs. 89 crore shall easily bring its debt-equity ratio in a safer territory without any substantial debt repayment.
Sai Silks is trading company with a net profit margin of just 4% and the finance cost of Sai Silks for the fiscal 13 will be as high as Rs. 16 crore (annualized) and still this company overlooking its debt burden that too in this high-interest regime which is quite puzzling.
In short, risk-averse value investors better stay away from this temptation irrespective of the safety net.
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