Sirohia & Sons IPO (SME) -Should you subscribe?
Sirohia & Sons IPO has hit the market yesterday. This company is issuing 30 L shares and asking for a premium of Rs 2 each per share. This company has several negative factors. What should be your take on Sirohia and Sons IPO. Does this SME IPO provide opportunity to investors to gain money by investing in these shares? What are the risks you should consider before investing in such Sirohia & Sons IPO?
About Sirohia & Sons Limited
This company is engaged in the business of dealing with fertilizers and pesticides catering to primarily to Tea Industry located in the North East region of the Country particularly the state of Assam and West Bengal. They receive orders of the specific fertilizers and pesticides required by the Tea Estates through our direct marketing and procure them from the manufacturers, which are mostly multinational companies like BASF India Limited Bayer Cropscience India Limited, Biostadt India Limited, DIC India Limited etc.,. Fertilizers and Pesticides are very important ingredients for Tea and other plantation and they protect the crop from the weeds and increase productivity. Some of the products which they deal with are DELTAMETHREINE, CYPERMETHRIN, BACILLUS, THIACLOPRID, METHOMYL
Issue details of Sirohia & Sons IPO
- IPO opens: 8-Sep-2014
- IPO closes: 10-Sep-2014
- Issue price: Rs 12 per share
- Minimum investment: Rs 120,000
- No of shares open for subscription: 30L shares
- Issue size: Rs 3.6 Crores
- Lead Managers: VC Corporate Advisors (P) Limited
- Listing: BSE SME platform
- Download Sirohia & Sons IPO Prospectus from SEBI website here
Purpose of the IPO: The funds would be used for the following purposes.
- To enable us to meet our Long Term Working Capital Requirements
- General corporate purpose
- Issue expenses
- Company generated revenue of Rs 2,266 Lakhs for the year ended Mar-10 and Rs 1,150 Lakhs for the year ended Mar-14. Means revenues have dipped by almost 50% in last 5 years.
- Company posted a profit of Rs 6.12 Lakhs for the year ended Mar-10 and a profit of Rs 13.54 Lakhs for the year ended Mar-2014.
Reasons to invest Sirohia & Sons IPO
Reasons not to invest in an Sirohia & Sons IPO
- Company revenues have been in the declining mode in last 5 years. We do not know when the declining would stop.
- Company is generating thin margins. For a revenue of Rs 11.50 Crores. It just generates Rs 13.54 Lakhs as profit for FY 2014. Such profit can be generated by any company who is generating even Rs 1 Crore business.
- Certain legal proceedings involving company Promoter/Promoter’s Group are pending at different levels of adjudication.
- There are certain Income Tax Notices/ Demands issued to this Company, Promoter and Group Entities
- Company has given an unsecured interest free advance some of its group companies. Such funds should be generally used for company purpose and its use as working capital / expansion could help companies to grow.
- Revenues from top-10 customer contribute to 46% of total revenue. Reducing such revenues in smaller number for top customers would help to secure revenues. In future some customers go away from business, this would not have much impact on business.
- Operations are significantly located in the eastern region and failure to expand operations may restrict our growth and adversely affect the business
- It has negative cash flows in 5 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.
- 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.
Recommendation / Investment strategy
- On an issue price of Rs 12, based on FY 2014 EPS of Rs 0.63, P/E Ratio works out to be 32.43 times. Based on last 3 years average EPS of Rs 0.37, P/E Ratio works out to be 63 times. Means company is asking for a price where P/E ratio is in between 32 to 63. Its competitors like UPL Limited P/E Ratio is just 32 (Highest) and Bharat Rasayan Limited is 8.4 (Lowest) and at industry level P/E is only 26.6. Hence asking for Rs 12 including premium is very high.
- Sirohia & Sons IPO has several negative factors. Company revenues are in declining mode. Profits are very thin. Company does not use funds for own purpose, but lend to group companies for interest free. Since this company is coming for public issue in 2014, it would have shown some Rs 13 Lakhs as profits. We should be very cautious and should avoid such IPO’s.
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Sirohia & Sons IPO (SME) -Should you subscribe
Note: I have seen some comments on my blog indicating that I reject the majority of SME IPO’s which are coming to public for investments. While on this blog (myinvestmentideas.com) I aim to explore best investment options and best saving ideas, I felt it was equally important that I should tell “What are bad investments” too. Investors should not get into a trap and burn their fingers. I welcome any suggestions to improve these SME IPO articles in future.