R&B Denims SME IPO – Should you subscribe?

R&B Denims SME IPO; R&B Denim IPOR&B Denims SME IPO – Should you subscribe?

R&B Denims IPO (SME) is opening for subscription on 28th March, 2014. Like Women Next Lingerie (where the IPO is being opened this week), even this company has started its operations 3.5 years back. R&B Denims Limited is issuing 37.1 Lakh shares @ Rs 10 each aggregating to Rs 3.71 Crores. How does the financial look for R&B Denims Limited? Can we make money by investing in a R&B Denims IPO or not?

About R&B Denims Limited

Surat Based R&B Denims Limited is primarily engaged in the manufacturing of Denim Fabrics. Today they are manufacturing various types of Denims ranging from 9 to 14 Oz/sq.yd and with Open End/ Ring Spun Yarns, Slub Yarns, Multi Count, Cottons and Polyester Spandex with Indigo Bottom Sulphur Toppings and Sulphur Bottom and Indigo Toppings with both Foam and Wet finishes at their state of art facility located near Surat, Gujarat. Current installed capacity is 12.50 million meters pa. Going forward, they intend to manufacture premium quality denim fabric and tap new markets.

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Issue details of R&B Denims IPO

  • IPO opens: 28-Mar-2014
  • IPO closes: 4-April-2014
  • Face value: Rs 10 per share
  • Issue price: Rs 10 per share
  • Minimum bid: 10,000 shares and multiple thereof
  • Maximum retail bid: 20,000 shares
  • Minimum investment: Rs 100,000
  • Listing: BSE SME
  • Download R&B Denim Prospectus from this SEBI link

Purpose of the IPO: The funds would be used for the following purposes.

  • Reduce overall debt of the company by repayment of outstanding loans from Bank of India
  • To meet the issue expenses

Company Financials

  • The company has posted revenue of Rs 6,059 Lakhs for the year ended Mar-2013 and Rs 4,301.96 Lakhs for 6 months ended Sep-2013.
  • The company has posted a loss of Rs 3.85 Lakhs for the year ended Mar-11 Vs profit of Rs 83,000 for the year ended Mar-2013. First 6 months of this financial year (FY 2013-14) it made a profit of Rs 12.50 Lakhs.

Reasons to invest R&B Denims IPO

  • Good revenue growth in last one and half years. Revenues increased from Rs 6,059 Lakhs from FY 2012-13 to Rs 4,301.96 Lakhs for 6 months of this financial year (FY 2013-14). If we assume a similar growth, we can predict that it can make Rs 8,603 Lakhs revenue for FY 2013-14.

Reasons not to invest in a R&B Denims IPO

  • Limiting operating history of 3.5 years only. Out of which there are no revenues in first 2 financial years.
  • It earns thin margins. On revenues of Rs 6,059 Lakhs in FY 2012-13, it made profits of Rs 83,000 only which is 0.01%. Means these can be easily wiped-off with small increase in raw material prices or even with small competition.
  • It earns revenue of 95% from top 10 customers, which poses risks to the business.
  • It gets raw material of 93% from top-10 suppliers. They can influence the raw material prices and profits for this company can decline.
  • There are negative cash flows in the last 3 years, which could increase the cost of operations in the future.
  • ICRA rates this company credit rating as B+ for long term bank facilities. This indicates that it may incur high costs to borrow money from banks.
  • SME IPO’s are trading in low volumes. Liquidity could be an issue.

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Recommendation / Investment strategy:

  • Average EPS for the last 3 years is Rs 0.01 and last financial year ended Mar-2013 is Rs 0.02. Based on last 3 years average EPS of Rs 0.01 and issue price of Rs 10, the P/E ratio works out to be 1,000. Similarly, based on last financial year EPS of Rs 0.02, P/E ratio works out to be 500. Its competitors like Lambodhara textiles P/E ratio is 16.20 (Highest) and SEL Manufacturing Limited is at 0.80 (Lowest) and average at the industry level is 4.80. Hence, the issue price of Rs 10 (which is minimum for issuing shares) is expensive based on its current earnings for this IPO of R&B Denim.
  • Though the company is showing good revenues in last 1.5 years, due to short operating history, thin margins and other negative factors indicated above, my recommendation to investors is to be very cautious and stay away from such IPO’s.

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R&B Denims IPO

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