Khemani Distributors & Marketing IPO – Is it worth investing?

Khemani Distributors & Marketing IPO ReviewKhemani Distributors & Marketing IPO – Is it worth investing?

Gujarat based, Khemani Distributors & Marketing IPO would open for subscription on 16th March, 2016. Khemani Distributors & Marketing Ltd is engaged as a redistribution stockist of Hindustan Unilever Ltd. The company revenues have grown over 87 times in last 5 years. What are the positive factors in Khemani Distributors & Marketing IPO? What are its hidden factors in Khemani Distributors & Marketing IPO?  Should you invest in such company which is in just a redistribution business?

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About Khemani Distributors & Marketing Limited

The company is currently engaged in the business of trading in FMCG products of Hindustan Unilever Limited as a ‘Redistribution Stockist’ in Surat, Gujarat. Its product portfolio includes (a) personal care products; (b) home care products; and (c) food and drink products.

Issue details of Khemani Distributors & Marketing IPO

  • IPO opens: 16-March-2016
  • IPO closes: 18-March-2016
  • Face Value: Rs 10 per share
  • Issue price: Rs 100 per share
  • Issue size: Rs 15.84 Crores
  • Lead Managers: Choice Capital Advisors Private Ltd
  • Listing: BSE SME
  • Download Khemani Distributors & Marketing IPO Prospectus from SEBI Website at this link

Purpose of the IPO

1. Repayment of unsecured loans;

2. To meet the working capital requirements;

3. General corporate purposes; and

4. To meet the Issue expenses.

Company Financials (reinstated)

  • Company generated revenue of Rs 78.92 Lakhs for the year ended Mar-11 and Rs 6,882.06 Lakhs for the year ended Mar-15. For 8 months ended Nov-15, it generated revenue of Rs 4,787.45 Lakhs.
  • Company posted a loss of Rs 0.36 Lakhs for the year ended Mar-11 and profit of Rs 733 Lakhs for the year ended Mar-2015. For 8 months ended Nov-15, it generated a profit of Rs 4.73 Lakhs.
  • Its restated post bonus EPS for FY 2015 is Rs 26.35 and last 3 years average EPS 13.32

Khemani Distributors and Marketing IPO - Financials

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Reasons to invest Khemani Distributors & Marketing IPO

  • Its revenues have grown by 87 times in last 5 years.

Reasons not to invest in a Khemani Distributors & Marketing IPO

  • Company generates thin margins. It posted 0.1% margins for the 8 months ended Nov-15.
  • Company does not have a long term agreement with its sole supplier – Hindustan Unilever Limited
  • The company is dependent only on one supplier for the procurement of all its products i.e. HUL. Any dispute/disagreement with the HUL might adversely affect the Company's ability to procure material on time and might adversely affect Company business.
  • Company has a very limited operating history in trading in various products and services, which may make it intricate for investors to evaluate Company past performance.
  • Company operations are significantly located in the Surat region of Gujarat and failure to expand Company operations may restrict Company growth and adversely affect Company business.
  • Company has entered into a Redistribution Stockist Agreement with HUL. Any non-compliance with the terms and conditions of the said agreement may lead to termination of the agreement.
  • There are certain outstanding litigations involving the Company and one of the Company Group Entity which are pending at different stages before certain statutory authorities. Any rulings by such authorities against the Company and Group entity may have a material adverse impact on Company operations.
  • Company had negative cash flow in recent fiscals. Sustained negative cash flow could adversely impact Company business, financial condition and results of operations.
  • SME IPO's listed are trading in low quantity, hence there could be liquidy issues.
  • Other risk factors (Internal and external) can be viewed in the draft prospectus from Page no. 12 onwards.

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Recommendation / Investment strategy

  • On the issue price of Rs 100 and on FY15 EPS (post bonus) of Rs 26.35, P/E ratio works out to be 3.8x. Similarly, on last 3 years post bonus EPS of Rs 13.32, P/E Ratio works out to be 7.5x. Means company is asking issue price of Rs 100 at 3.8x to 7.5x P/E Ratio. There are no listed peers in a similar business to check whether the issue is highly priced or reasonably priced.
  • Company posted strong revenue growth in last 5 years. However, it generates thin margins. While it posted 10% margins in FY15 which looks good, in the last few years and for 8 months ended Nov-15, it posted margins of just 0.1% to 0.2%. These thin margins can easily wipe-off with a small increase in costs. It solely depends on HUL which is high risk. The company has to shut down its business if HUL terminates the agreement. Investors should avoid this IPO considering all these negative factors.

Disclaimer: I do not have an interest 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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Khemani Distributors & Marketing IPO Review

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