Oasis Tradelink SME IPO-Should you invest?

Oasis Tradelink SME IPOOasis Tradelink Limited SME IPO-Should you invest?

Gujarat based Oasis Tradelink SME is coming up with an IPO to issue 20 Lakh shares @ Rs 30 per share which includes Rs 20 per share as premium. Oasis Tradelink SME IPO would open for subscription on 23rd June, 2014. Oasis Tradelink Limited revenues jumped to 70% in the last financial year ending Mar-2013. It is going to exceed revenues in FY 14 compared to previous years. Everything looks good? Wait, please read this complete article before you decide to invest in an Oasis Tradelink SME IPO. Are these revenues sustainable? Does Oasis Tradelink IPO investment is expected to provide good returns to investors?

About Oasis Tradelink Limited

Oasis Tradelink Limited is a trading and marketing company of branded and packaged edible oil business. They have started commercial operations as a trading and marketing entity in edible oils. Gradually, they have entered into the manufacturing and production by leasing a packaging/production unit in the Kadi town of Mehsana, a district in north Gujarat.

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Issue details of Oasis Tradelink IPO

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

  • To part-finance incremental working capital requirements
  • Brand Building
  • General corporate expenses
  • To meet the expenses of the Issue

Company Financials

  • Company has posted revenue of Rs 4,339 Lakhs for the year ended Mar-2012 and Rs 7,357.65 Lakhs for the year ended Mar-2013, indicating a strong growth of 70% in 1 year. First 9 months of this financial year (ended Dec-2013) it made revenue of Rs 9,154.34 Lakhs.
  • Company posted a profit of Rs 16.15 Lakhs for the year ended Mar-12 and a profit or Rs 13.13 Lakhs for the year ended Mar-2013. First 9 months of this financial year (ended Dec-2013) it made a profit of Rs 14.37 Lakhs.

Oasis Tradelink SME IPO-Financials

Reasons to invest Oasis Tradelink IPO

  • Strong revenue growth of 70% in the last financial year ending Mar-2013. Considering the growth of 9 months ended Dec-2013, it is expected to post 40% growth in FY14 (in the absence of last quarter revenues, this assumption is made)

Reasons not to invest in an Oasis Tradelink IPO

  • Company has not earned any revenues from FY 2009 to FY 2011, but there are some expenses incurred. I am not sure how it could happen. Company is showing strong growth only in last 2 years. We need to really wait and watch whether this momentum continues or not.
  • Company profits are thin. For revenues of Rs 91.54 Crores it just earned Rs 14.37 Lakhs indicating 0.2% margins. In the last 1 year I have seen SME IPO’s coming with 2% to 4% margins, but this looks very odd that it generates only 0.2% margins.
  • It has negative cash flows in last 3 years. This indicates that it need to borrow loans for high rate of interest and has difficulty in managing working capital requirements. This would affect the profits of the company.
  • This company does not own packaging unit and this has been taken on lease. Any demand to vacate such unit can cause disruption in business.
  • Stiff competition in business from organized and un-organized players
  • Success depends on quality control process
  • Commodity price fluctuations can adversely affect financial performance. Its thin margins can be easily wiped off
  • Substantial debt of Rs 303 Lakhs for period ending Dec-2013.
  • SME IPO’s are trading on low volume. Liquidity of such shares could be an issue. Stock brokers can easily manipulate the price of the stock.

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Recommendation / Investment strategy:

  • Company has not earned any revenues prior to FY 2012. Based on FY 2013 EPS of Rs 1.08, P/E Ratio works out to be 27.78 times. Based on last 3 years Avg EPS of Rs 0.92, P/E ratio works out to be 32.73. The P/E ratio of its competitors of the highest is 28.5 and lowest is 5 and industry composite is 9.6. Hence the issue price of Rs 30 is very high for this IPO where it demands 27+ P/E ratio.
  • This is one more IPO where we see good revenues, but very thin margins of 0.2% of revenues. Investors are not going to enjoy any of its profits.
  • Though there is strong growth in revenues in last 2 years, considering very thin margins, high issue price and several risks involved, investors should stay away from such IPO’s. In coming quarters, if the margins are improved consistently for a couple of quarters, one can look to invest in such stocks.

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Oasis Tradelink SME IPO

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