RDB Rasayans IPO price: overstated and ridiculous

Will you ever invest in an IPO that asks you to pay 70 times what it earned this year? That’s what RDB Rasayans is asking you to do even if you go by the lower end of the price band at Rs 72. The company earned Rs 1.8 crore this year and will have a post-issue equity base of 1.7 crore shares. That takes the ratio between price you pay and earnings per share to 70.8 times. Compare this to its peers like Neo Corp International and Polyplex, who have this ratio at 4.14 and 3.6 times!

RDB Rasayans, which manufactures PP Tape, PP woven sacks, woven fabrics, industrial woven fabric, PP woven fabrics and PP woven bags, brought its issue to the markets yesterday. It is looking at bagging Rs 35.55 crore from the markets.

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[caption id=“attachment_89668” align=“alignleft” width=“380” caption=“The objective of the issue is rather okay as the company needs the money to build another plant. Reuters”]  [/caption]

Its sister concern, RDB Realty and Infrastructure, which is listed on the exchange, reached a high of Rs 150 on the day of listing in December last year. Now the stock is trading at Rs 38.

The objective of the issue is rather okay as the company needs the money to build another plant to increase their manufacturing capacity by 7450 million tonnes per annum. It needs around Rs 27 crore for that. It needs around Rs 31 lakh for the issue expenses. What it needs the rest of the money for is not mentioned in the prospectus.

But the risks to the IPO are aplenty. The prospectus says that the promoters are not experienced in the field of flexible packaging that the company is into and have to depend on the key managerial staff for running the company. There are 35 group companies or ventures by similar promoter group and all of them are running into losses for last three years. Sure that doesn’t say much about this particular IPO, but tells quite a lot about the ability of the group.

The company has not placed order for 98 percent of the equipments and machineries that is required for the new project. The implementation of the project is already delayed as the funds for it will come entirely from the IPO. If the orders are placed late, the project will be delayed further. If prices of required machinery do not remain the same, the cost for the project could go up. The company is also dependent on few customers which might become a threat to its income numbers if any of them back out. The top customer gives the company 15 percent of the income while top 10 customers make up 85 percent of the company’s income. RDB Rasayans itself has been earning negative cash flows.

The company also admits that it has failed to comply with the Companies Act, 1956 for most of the time from 2006-10 because it never had a company secretary. This rings an alarm bell for the corporate governance of the company.

As far as the financials of the company are concerned, there is hardly any point looking at the sales or profit figures over the last 5 years because there has been no consistency. Gross Sales have grown 50 percent in 2011, -10 percent in 2010, 21 percent in 2009 and 6 percent in 2008. Net profit figures are equally inconsistent. It stood at Rs 1.8 crore in 2011, Rs 0.78 crore in 2010, Rs 1.95 crore in 2009 and Rs 0.9 crore in 2008.

Looking at the fundamentals of the company, the valuation grossly overstated.