IPO Alert: SRG Housing Fin taps markets with 35 lakh share issue

By VS Fernando

At a time when real estate is at cross-roads, SRG taps market for realty financing! ‘Market Maker’ who is the main underwriter of the SRG issue holds the key as none of the SME scrips finds regular trading today.

[caption id=“attachment_425794” align=“alignleft” width=“380”]  Reuters[/caption]

The Offer

The Udaipur-based SRG Housing Finance Ltd (SHFL) is issuing 35.04 lakh shares of Rs 10 paid-up at a fixed price of Rs 20 a piece. While 4.98 shares are reserved for the promoters, ISJ Securities of Mumbai is subscribing to 4.08 lakh shares as ‘Market Maker’.

The balance (25.98 shares) is offered to the public through the SME platform of BSE. Whereas the market maker has underwritten to the tune of 17.04 lakh shares (Rs 3.41 crore), the lead manager, Aryaman Financial Services has committed to underwrite the balance 13.02 lakh shares (Rs 2.60 crore).

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Like the other SME IPOs, the minimum application amount has been kept at as high as Rs 1.2 lakh. That is, investors have to apply for a minimum of 6000 shares and multiples thereof.

Issue Object

Notwithstanding the present pathetic plight of the Indian real estate industry, the little known SHFL has proposed to expand its activity in the field housing/real estate finance. Of the Rs 7.01 cr issue proceeds, the company has planned to deploy Rs 6.35 cr in housing and related financing. Nevertheless, the proposed funding plan is not appraised by any external agency.

Background

SHFL is a part of the SRG group promoted by Udaipur-based Jains. Though the group has seven more companies in its fold, SHFL will be the first company to tap the capital market. Interestingly, the group has two more companies in the NBFC segment. In fact, none of the group companies has any creditable record to speak about.

In twelve years between December 2000 and March 2012, SHFL made as many as 12 preferential allotments thereby taking its capital from just Rs 500 to Rs 3.05 cr. In April 2012, it made 1:2 bonus issue enlarging the capital to Rs 4.58 cr. Even before officially going public, the company has a public stake of 34% in the pre-issue capital.

As regards the track record of SHFL, the company was incorporated more than a decade ago in 1999 under the name Vitalise Finlease Private Ltd. The name was changed to the present one in 2000. The company’s revenue crossed the crore-mark only in last fiscal. Though profit-making for many years, the company is yet to pay dividend.

Business

SHFL is primarily engaged in the business of providing finance for house ownership, offering individual home loans and loans against property. The company seems to operate within Rajasthan having a head office and 3 satellite centers. It proposes to open another ten satellite centers in tier-II & III cities, District and Taluk Headquarters.

The company’s loan portfolio has grown from Rs 3.19 cr in fiscal 2008 to Rs 7.57 cr in fiscal 2012. Loans to salaried and non-salaried borrowers were in the ratio of 13% and 87% respectively.

Prospects

SHFL speaks of encouraging prospects for housing finance companies. Of course, the industry clocked impressive performance in fiscal 2011 in terms of business growth and profitability. However, of late, the industry is reeling under uncertainties caused by the economic slow down and inflation. When established players are feeling the pinch, how a small fry like SHFL will survive in the downturn is anybody’s guess.

Valuation

The IPO price of Rs 20 values SHFL at a market cap of Rs 16 cr. For a decade-old company this may not be a steep valuation. But, will the premium issue fetch return in the foreseeable future? At the end of fiscal 2012, the company’s bottom line stood at Rs 26 lakh which yields an EPS of 84 paise on then equity of Rs 3.05 cr. Post-IPO, the company’s capital will increase to Rs 8.08 cr which will pull down the EPS considerably in the current year.

Well established players like Can Fin Homes, GIC Housing and Dewan Housing are currently available at a P/E of less than 8 times their earnings, how can one justify a P/E of more than 17 for SHFL. Moreover, while others are already in the dividend list, SHFL is yet to pay dividend. In fact, if one were to invest in the housing finance industry, GIC Housing looks attractive in terms of yield and P/E.

Manager’s Track

The Mumbai-based Aryaman Financial seems to be the favorite of SME issuers. Of the seven SME IPOs that have hit the market, four have been managed by Aryaman. The investment banker might have been proved to be more promoter-friendly. But, the post-issue performance of the IPOs brought out by him certainly reveals that the companies advised by the investment banker lack class.

Non-SME IPO Midvalley Entertainment handled by Aryaman in January last year is now suspended by BSE due to penal reasons. The first two SME IPOs lead managed by the same investment banker faces irregular trading. Incidentally most of the SME issues listed so far too have failed to get a regular trading. Max Alert, managed by Comfort Securities, posted a fabulous gain of 157% on listing but, soon went into oblivion. This makes one wonder, for whose benefit were the SME issues made for.

Concerns

• Little known promoter; maiden public venture

• Market maker, believed to be an associate of promoters, has underwritten the significant portion of the IPO

• Disproportionate ratio of non-salaried borrowers poses high risk

• Doubtful loans (of the NPAs) have jumped from Rs 5 lakh to Rs 23 lakh in fiscal 2012 which is significant as compared to the bottom line of Rs 26 lakh

• Spread between yield and cost of funds has dropped from 13% in 2008 to less than 6% in 2012

• Company operates from a tiny 297 sq ft office in Udaipur taken on lease from promoter at a monthly rent of over Rs 57 per sq ft.

• Paid advance of Rs 15 lakh for acquiring office property but failed to identify alternate sources for meeting the remaining installments

• Office property booked in 2006 is yet to be completed even after five long years

• Reported negative cash flow from operations in last three years

• Promoters have multiple companies related to finance and capital market operations

• None of the SME IPOs are regularly traded despite having the so-called ‘market maker’

V S Fernando is a veteran IPO Analyst who has been tracking domestic Public Offerings since 1986.