Tricky track: SRS IPO brings with it too many risks

SRS Real Infrastructure Limited was listed in 1995 and has hardly seen any movement for a long time. The Securities and Exchange Board of India (Sebi), the capital market watchdog, had rapped four promoters for malpractices in its initial public offering. They were banned for four years from accessing capital markets.

[caption id=“attachment_65874” align=“alignleft” width=“380” caption=“The main advantage for SRS lies in its consumption plays as all the segments are likely to grow. Reuters”]  [/caption]

This same group is now back with the initial public offering of SRS, which opens on Tuesday. The company deals in cinema, food and beverages, retail, FMCG (fast moving consumer goods) and jewellery. It wants to raise Rs 525 crore and has fixed a price range of Rs 58-65.

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Strength:

• SRS has seen exponential income growth over the past four years. Its revenue has grown at a compound rate of 144 percent, operating profits (profit before interest tax depreciation and amortisation) at 54 percent and net profit at 39 percent during 2007-11.
• Its net profit margins hover around 2 percent, at par with retail players, but lower than jewellery players in the market.
• Going by the earnings per share for 2011, the valuations range (price earnings or PE multiple) from 16-18 times. Titan Industries is trading at 35 times its 2011 earnings. Retail players like Shoppers Stop and Pantaloon have even better valuations. So, given the valuation logic, the IPO pricing is not that high.

Weakness:

• It plans to spend around Rs 100 crore for the cinema business while it earns most of its income from the jewellery segment.
• This gives a sense of lack of clear focus in the business.
• ICRA has assigned it Grade 3, which indicates average fundamentals.

Opportunities:

• The main advantage for the company lies in its consumption plays as all the segments are likely to grow.
• It is also helped by its geographical presence, mainly in tier 2 and tier 3 cities, which reduces competition as well.
• It is also planning to pursue franchise-based models where even asset light model can give better brand recognition.

Threats:

• The company has applied for 36 trademarks at the time when it filed its draft prospectus, which are pending for approval. The issue is these trademarks may not be exclusively owned by SRS. The company has issued a ‘No objection certificate’ for other companies that have applied for the trademarks and can use them on approval. A business like running cinema halls or food joints which depend crucially on brand recognition, this might be suicidal for the company.

• The past record of the management and no single focus in the business act as the biggest dampeners.

Recommendation: Avoid