Junction Fabrics & Apparels IPO-Should you subscribe?

Junction Fabrics and Apparel IPOJunction Fabrics & Apparels IPO-Should you subscribe?

Junction Fabrics and Apparels IPO would open for subscription on 25th June, 2015. Junction Fabrics & Apparels Limited revenues has grown 5 times in last 3 years which shows robostic growth. What are the positive factors in Junction Fabrics & Apparels IPO?. Should you invest in this Junction Fabrics IPO? What are the risk factors to be considered before you invest in a such IPO’s?

About Junction Fabrics & Apparels Limited

Junction Fabrics and Apparels Limited is engaged in the business of garment manufacturing and selling both Knitted Fabric as well as Garments. Its range of garment products covers all the age group segments such as kids wear, mens wear, ladies wear, boys & girls wear. They use variety of knitted fabrics such as 100% cotton, 100% polyester, blended (cotton and polyester) and printed polyester fabrics in the production of garments. They are also engaged in selling of knitted fabrics to domestic garment manufacturers. They have approximately 26,016 sq. ft. size area manufacturing plant located at Nethaji Apparel Park, Tirupur, Tamil Nadu..

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Issue details of Junction Fabrics & Apparels IPO

  • IPO opens: 25-Jun-2015
  • IPO closes: 29-Jun-2015
  • Face Value: Rs 10 per share
  • Issue price: Rs 16 per share
  • Issue size: Rs 1.6 Crores.
  • Lead Managers: Hem Securities Limited
  • Listing: BSE SME
  • Download Junction Fabrics & Apparels Limited IPO Prospectus from SEBI website here

Purpose of the IPO

  • To meet Working Capital Requirement
  • To Meet the Issue Expenses

Company Financials (reinstated)

  • Company generated revenue of Rs 200 Lakhs for the year ended Mar-13 and Rs 1,455 Lakhs for the year ended Mar-14.  It earned revenue of Rs  945.97 Lakhs for 9 months ended Dec-14.
  • Company posted a profit of Rs 3 Lakhs for the year ended Mar-13 and a Profit of Rs 12.32 Lakhs for the year ended Mar-2014. Its profit is Rs  10.93 Lakhs for 9 months ended Dec-2014.
  • Its EPS for FY 2013-14 is Rs 1.46 and last 3 years Avg is Rs 6.29. EPS for nine months ended Dec-2014 is Rs 1.29

Junction Fabrics and Apparel IPO-Financials

How are the financial ratios of this company compared to its Peers?

Junction Fabrics and Apparel IPO-comparison with peers

Reasons to invest Junction Fabrics & Apparels IPO

  • Robost revenue growth in last 3 years. If we annualize 9 months revenue of FY 2014-15 to entire year, it would cross Rs 1,260 Lakhs. This indicates that company has grown almost 5 times in last 3 years. However, compared to FY2014, there is dip of 13% in revenues.

Reasons not to invest in a Junction Fabrics & Apparels IPO

  • Profits are thin. It earned profit of 1% (marginally up or below this)  in last 3 years. Slight variation in revenues and operating costs can have a significant impact on its operating margins.
  • Company, Promoters and its Promoter Group Entity has received notices under section 143(1), 143(1a) and 143(3) of the Income Tax Act, 1961 for various assessment years which may result into potential litigation and could have an impact on the business and financial results of the Company.
  • They have applied for certain registration and approval for operation of its business which are pending for approval from respective statutory Authorities.
  • They require certain approvals, licenses, registrations and permits for its business, and the failure to obtain or renew them in a timely manner may adversely affect its operations.
  • Company has allotted Equity Shares during the preceding one year from the date of the Prospectus which is lower than the Issue Price.
  • Limited operating experience, limited brand recognition in new markets and in the apparel industry may limit its expansion strategy and cause its business and growth to suffer.
  • Company had made an application for registration of brand under Trade Marks Act and the same was objected.
  • Its revenues are dependent on a limited number of wholesalers who acts as intermediary between company and its customer. The loss of its major wholesalers or a decrease in the volume of apparels they source from us may adversely affect company revenues and profitability.
  • Company has taken an interest free unsecured loan from one of its Promoter Director Mr. Prem Dinanath Aggarwal, the total outstanding amount of which as on December 31, 2014 is ` 91.76 Lacs. Accordingly in case its Promoter recalls the said loan, it may have an adverse affect on company cash flow and financial condition.
  • Promoter Group Entities are engaged in the line of business similar to Company.
  • Other risk factors (Internal and external) can be viewed in prospectus Page no. 13 onwards.

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Recommendation / Investment strategy

  • At an issue price of Rs 16 and EPS for FY 2013-14 of Rs 1.46, P/E Ratio works out to be 10.96. At an issue price of Rs 16 and last 3 years average EPS of Rs 6.29, P/E Ratio works out to be 2.56. Means company is asking for share price where P/E ratio is between 2.56 to 10.96. We should ignore last 3 years EPS and P/E as there is spike in FY2012. Ideal is to compare FY 2014 where P/E Ratio is 10.96. Its competitors P/E ratio is 257 for Trent Ltd – Highest and 2.8 for Store One Retail India Limited (Lowest) and industry average is 28.2. Hence issue price is reasonably priced.
  • Junction Fabrics & Apparels Limited revenues show good improvement in last 3 years. However, revenue dip in current year compared to last year is a concern. Negative factors include short term operating history, thin margins and other risk factors indicated above.
  • Currently, I am neutral on this IPO, especially from thin margins point of view. IPO’s which are listed recently are undergoing pressure in their share price. IPO’s like this may take a beating upon listing. It is better to stay away from such IPO’s at this point of time.  

Disclaimer: I am not interested in investing in this IPO. The idea of giving positive and negative factors to investors in this article is to create awareness and education about this IPO. One should NOT constitute this as investment advice to buy or not to buy. Please consult your investment advisor before you invest in such high risk investment options.

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Junction Fabrics & Apparels IPO-Should you subscribe

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