Promoters’ cost of holding speaks the reality!
SMEs admitted by NSE are generally perceived to be better than their counterparts on BSE’s SME platform. But, Shaival Reality would change that perception. The low-cost house builder wants to transform itself into a logistics company though its operations are dominated by `long term loans and advances’ whose return could not even cover losses on other operations. What’s more, four private companies whose background is not disclosed subscribed shares at Rs 100 and sold the same a year later at 90% discount to promoters! Surely, Shaival exposes NSE’s quality of due diligence!
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OFFER AT A GLANCE |
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Name |
Shaival Reality Ltd |
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Offer Amount |
Rs 5.28 cr |
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Offer Quantity |
5.28 lakh shares of Rs 10 each |
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Offer on Total Equity |
27.4% |
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Post-IPO Promo stake |
72.7% |
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Post-IPO Capital |
Rs 1.93 cr |
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Offer Price |
Rs 100 |
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Application Quantity |
1200 & Multiples of 1200 |
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Offer Opens |
September 15, 2015 |
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Offer Closes |
September 18, 2015 |
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Listing |
SME Platform of NSE |
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Rating |
Nil |
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Lead Manager |
Sarthi Capital Advisors |
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Market Maker |
Choice Equity Broking |
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Underwriter |
Sarthi Capital Advisors (100%) |
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Registrar |
Bigshare Services |
The Offer
Fresh Issue of 5,28,000 equity shares of face value of Rs 10 at a price of Rs 100 each aggregating to Rs 5.28 cr. The IPO constitutes 27.37% of the post-issue paid up equity capital of the company. Of the public offer, 26400 shares are reserved for the `Market Maker’ – Choice Equity Broking. The lead manager to the issue, Sarthi Capital Advisors, has underwritten the entire issue. Investors have to apply for a minimum of 1200 shares or Rs 1,20,000. The shares are to be listed on the SME platform of NSE.
Issue Object
Besides achieving the benefits of listing, the IPO proceeds net of issue expenses (Rs 40 lakh) is to be utilized for funding the long term working capital of the company (to the tune of Rs 4.88 cr).
Background
The Ahmedabad-based Shaival Reality Ltd (SRL) is nearly a two-decade-old company, incorporated in 1996. As per the Memorandum of Association, the company’s main objects were infra-construction, real estate development, transportation & logistics services and IT related activities. However, SRL has so far concentrated on construction of low cost houses using precast concrete slabs, transportation of liquid cargo and money lending.
SRL was holding 90% in Shaival Investment Consultancy (P) Ltd in FY14 which has ceased to be the subsidiary in FY15, says the offer document. Also, SRL had strategic and financial partnership in the joint venture Katira Construction Ltd where SRL acts as Technology provider. The objective of JV was pooling of resources and collaborating in preparation and submission of applications and bids for the work of design and construction of 512 dwelling units at Bharuch, Gujarat, under ‘Rajiv Aavas Yojna’. SRL had similar arrangement with Malani Construction Co. too for construction of 1776 housing units in Palanpur Nagapalika.
As regards the companies and firms forming part of the promoters and their financial track, the Shaival group reportedly has in its fold Shaival Petroproducts Pvt Ltd, Shaival Investment Consultancy Pvt Ltd, Olive International Education Foundation, InSync Education Pvt Ltd, Acarya Realty Pvt Ltd, Embrion IVF Pvt Ltd and Shaival Transport LLP. Of these, Acarya Realty and Shaival Transport LLP are having business objects similar to SRL. Shaival Petroproducts, Olive International Education Foundation, InSync Education and Acarya Realty are currently having negative net worth.
Promoter & Cost of Holding
According to SRL’s offer document, Mayur Mukundbhai Desai (51), who is designated as managing director, is the promoter of the company. Desai, son-in-law of Gujarat’s well known political personality Keshubhai Patel, is a MBBS, MD (Gynecology) from B.J Medical College, Ahmedabad. He has reportedly worked as an Asst. Professor of Gynecology from the year 1988 to 1998. The offer document claims that he got associated with the board of SRL in the year 1996 though he became a shareholder of the company only in 2002.
In fact, SRL’s shareholding has an interesting reading. The 1996-registered company’s initial subscribers to Memorandum were Mayur Desai’s father Mukundbhai (100 shares) and brother-in-law, Bharatbhai (100 shares). In February 2000 SRL allotted shares at par to Mayur’s father (2 lakh), Mayur’s mother (50000) and Mayur’s two children (50,000 each). In December 2006 the company gave a 4:1 bonus which enhanced the holding of Mayur Desai’s extended family five-folds.
Three months after the bonus issue, in March 2007, SRL allotted 1 lakh shares each to two little known companies, Jay Adhyashakti Marketing Pvt Ltd and Bagrecha Marketing Pvt Ltd, at a premium of Rs 90 per share. In Nov 2008, SRL allotted another 2 lakh shares at same premium to more closely held entities, D.S. Integrated Finsec Pvt Ltd and Sambedaba Tie-up Pvt Ltd (1 lakh shares each).
However, according to the offer document, SRL’s promoter Mayur Desai and his spouse (a practicing gynecologist) acquired 9.01 lakh shares (64.31% of SRL’s pre-IPO capital) through transfers from existing shareholders during the nine years between February 2002 and December 2010. Strangely, the four private companies who acquired 4 lakh shares at an aggregate cost of Rs 4 cr have sold the same for only Rs 40 lakh that is at a discount of 90%!
Post-transfers, the promoter Mayur Desai holds 7.01 lakh shares (50% of the paid-up capital) at an average cost of Rs 7.14 a piece. Sonal Mayur Desai has acquired the 2 lakh shares (14.3%) for Rs 20 lakh at Rs 10 a share, which were earlier issued by the company at a value of Rs 2 cr (100 per share). Shaival Mayur Desai and Abhishek Mayur Desai hold 2.5 lakh shares (17.8%) and 2.5 lakh shares (17.8%) respectively at an average cost of Rs 2 per share.
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PROMOTER’S COST OF HOLDING |
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DATE |
ACQUISITION |
SHARES |
COST |
VALUE |
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1-Feb-02 |
TRANSFER |
100 |
10 |
1,000 |
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1-Feb-02 |
TRANSFER |
50,000 |
10 |
500,000 |
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29-Dec-06 |
BONUS 4:1 |
200,400 |
0 |
0 |
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12-Jul-08 |
TRANSFER |
100,000 |
10 |
1,000,000 |
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12-Jul-08 |
TRANSFER |
100,000 |
10 |
1,000,000 |
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31-Dec-10 |
TRANSFER |
100 |
10 |
1,000 |
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31-Dec-10 |
TRANSFER |
50,000 |
10 |
500,000 |
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31-Dec-10 |
TRANSFER |
200,400 |
10 |
2,004,000 |
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TOTAL |
701,000 |
7.14 |
5,006,000 |
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Business
Currently SRL is having three business streams – Bulk Transportation of LPG Gas & Ammonia, construction of State Government & Nagarpalika housing projects and rental income from property.
The company claims to have young and well maintained fleets for transportation services. It reportedly owns 114 LPG tankers, each of 18 MT capacity and 8 Ammonia Tankers, each with capacity of 15 MT. The company’s clientele includes Reliance Logistics, HPCL, BPCL, IOC, GSFC, Sabero Organics, Jubilant Organics, etc.
SRL’s construction division caters to the low cost housing projects awarded by the Government as well as the private sector. The company uses precast concrete for its construction. Precast concrete comes handy when there are labour shortage and time delays. The company claims that precast technology helps in saving up to 64% of the time taken for similar projects using normal construction methods. SRL has reportedly constructed 320 dwelling units in Anand District and 324 units in Dahod using precast concrete.
Financial Performance
SRL’s top line has almost tripled, from Rs 5.16 cr in FY11 to Rs 14.60 cr in FY15. However, its construction as well as tanker revenue has fluctuated during this period. Though SRL identifies itself as a logistics company, its current turnover is dominated by construction contract receipts (74%). The company has derived a significant amount through other income which is largely of interest income. The company earned Rs 1.28 cr and 2.24 cr for the fiscals 2014 and 2015 respectively. Despite netting Rs 1.45 cr and Rs 2.62 cr other income in fiscals 2014 and 2015, the company ended in a deficit of Rs 1.6 cr and Rs 2.57 cr for FY14 and FY15 respectively.
The company, which has a gross block of Rs 25 cr (net block being Rs 14 cr), has borrowed heavily and has also lent liberally. In fiscal 2013, against its borrowing of Rs 27 cr, lending amounted to Rs 32 cr, of which nearly Rs 20 cr was given to a little known company, Infinium Motors Pvt. Ltd. In fiscal 2014, lending amounted to Rs 45 cr as against borrowings of Rs 49 cr. Here too, the company had lent Rs 23 cr to a single entity, Infinium Automall Pvt. Ltd. In fiscal 2015, both borrowing and lending were reduced. Of Rs 24 cr loans and advances, Rs 9.5 cr was given to Dharmanandan Infra Pvt. Ltd and Rs 2.9 cr was lent to Shantigram Estate Mgt. Pvt. Ltd. Why such large advances were made to select closely held entities unrelated to the promoters is not clear.
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FINANCIAL PERFORMANCE OF SHAIVAL REALITY |
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(Rs.lakh) |
Mar-15 |
Mar-14 |
Mar-13 |
Mar-12 |
Mar-11 |
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Operating Revenue |
1460 |
972 |
1157 |
493 |
516 |
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Other Income |
262 |
145 |
98 |
142 |
57 |
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Gross Income |
1722 |
1116 |
1255 |
635 |
573 |
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Operating Profit |
405 |
213 |
224 |
237 |
108 |
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Oper. Margin % |
9.8 |
7.1 |
10.9 |
19.3 |
9.9 |
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Finance Cost |
284 |
204 |
131 |
29 |
11 |
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Depreciation |
441 |
162 |
113 |
90 |
70 |
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Net Profit |
-257 |
-160 |
-15 |
85 |
19 |
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Net Oper. Cash Flow |
2020 |
-1229 |
-2307 |
-4 |
12 |
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Equity Capital |
140 |
140 |
140 |
140 |
140 |
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Reserves |
800 |
1127 |
1287 |
1299 |
1212 |
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Borrowings |
3326 |
4864 |
2718 |
182 |
374 |
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Lending |
2409 |
4498 |
3163 |
664 |
418 |
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Net Block |
1352 |
1496 |
925 |
803 |
1083 |
Valuation & Concern
At the end of fiscal 2015 SRL’s reserves stood at Rs 8 cr against which the company is asking for an issue premium of Rs 4.75 cr which may appear reasonable. Nevertheless, during last three years SRL has incurred an aggregate loss of Rs 4.32 cr against its tinny equity capital of Rs 1.4 cr which makes the issue price absurd. It’s worth noting here that the promoter’s family would hold more than 72% of the post-issue capital at an average cost of only Rs 5.71 per share. Moreover, for allotting shares at exorbitant premium to dicey companies and later transferring the same at a throw-away price to promoter’s family the management has to explain a lot.
Another factor that could affect the valuation is the contingent liabilities. The company has disputed IT demands of Rs16.27 lakh, Rs 27.60 lakh, Rs 27.60 lakh, Rs 27.60 lakh and Rs 95.84 lakh for the five fiscals from 2011 to 2015. It also faces VAT demands of Rs 30.60 lakh each for the same five year period.
Further, the company is scoring poorly on the corporate governance front. It has reportedly delayed filing of certain forms with the RoC. Interestingly, documents of few trucks (registration/permit/insurance papers) are not available with the company!
Manager’s Track
For the New Delhi-registered Sarthi Capital Advisors, SRL’s would be the eleventh SME IPO and the first on the NSE platform. Of the ten Sarthi-managed issues already listed, only Starlit Power System is currently quoting below the offer price. Nonetheless, Sarthi-associated SMEs have very poor record in terms of liquidity.
Tiger Logistics managed by Sarthi in 2013 has fetched fabulous return though the company is yet to join the dividend list. Without paying dividend Tiger has recently proposed a liberal 3:2 bonus issue in order to enlarge its capital beyond Rs 10 cr so as to make it eligible for moving from SME platform to the main frame. However, the quality of Tiger’s earnings, especially its operating cash flow is much to be desired.
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SARTHI CAPITAL-ASSOCIATED SME IPOs |
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ISSUER NAME |
IPO |
IPO |
Last |
Gain |
Days |
Days |
Liqid. |
|
|
Date |
Price |
Price |
% |
Listed |
Traded |
% |
|
Bothra Metals |
12-Mar-13 |
25 |
36 |
43 |
609 |
299 |
49 |
|
Tiger Logistics |
27-Aug-13 |
66 |
349 |
429 |
493 |
395 |
80 |
|
RJ Bio-Tech |
10-Sep-13 |
20 |
30 |
50 |
484 |
257 |
53 |
|
RCI Industries |
30-Dec-13 |
30 |
53 |
77 |
404 |
87 |
22 |
|
B.C. Power Control |
24-Feb-14 |
18 |
24 |
31 |
368 |
72 |
20 |
|
Starlit Power Sys |
29-Sep-14 |
18 |
16 |
-12 |
223 |
31 |
14 |
|
JLA Infraville Shop |
16-Oct-14 |
10 |
13 |
35 |
211 |
67 |
32 |
|
Akme Star Housing |
25-Feb-15 |
30 |
38 |
26 |
122 |
48 |
39 |
|
Mahabir Metallex |
9-Mar-15 |
10 |
11 |
5 |
117 |
22 |
19 |
|
Pecos Hotels |
23-Jul-15 |
50 |
50 |
0 |
24 |
7 |
29 |