Import-trader with little financial commitment vying for hefty `royalty’!

OFFER AT A GLANCE
Issuer Name	VCU Data Management Ltd
Offer Amount	Rs 10.88 cr
Offer Quantity	43.5 lakh shares of Rs 10 each
Offer on Total Equity	28.1%
Post-issue Promo stake	21.9%
Post-IPO Capital	Rs 15.50 cr
Offer Price	Rs 25
Application Quantity	6,000 & Multiples of 6,000
Offer Opens	October 4, 2013
Offer Closes	October 8, 2013
Listing	SME Platform of BSE
Rating	Nil
Lead Manager	Networth Stock Broking
Registrar	Sharepro Services

The just 6-month old Mumbai-registered VCU Data Management Ltd (VDM) proposes to make a fresh issue 75 lakh shares at a price of Rs.25 a piece aggregating to Rs. 18.75 cr. Of this, 31.15 lakh shares are reserved for promoters and 3.78 lakh shares are earmarked for the Market maker viz. Networth Stock Broking Ltd who is not only lead-managing the issue but has underwritten the entire public issue. The public portion of the present issue constitutes 28.1% of the fully diluted post-issue paid-up capital. Surprisingly, the promoters’ own stake in the final equity is as low as 21.9%!

 

Issue Object

The main object of the present issue is to augment the capital base and meeting the working capital requirement which is estimated to be more than Rs 25 cr. Even though the company boasts of having high tech products, there is no investment in technology or manufacturing assets.

 

Business

The company claims to be the owner and provider of “Rights for one of the world’s most unique Interactive Audio/Video Live Streaming hardware/software solutions for the masses at high quality and low bandwidth”. The product `VCU Pack’ boasts unique video encoder, media server, decoder and 2G/3G/4G/wifi and bandwidth aggregation technology with over 6 years of research and development from 7 countries.

The company claims to have developed a unique product and does not foresee any big local competition from any organized or unorganized player in the industry. Nevertheless, neither the company has any facility to develop or manufacture the product, nor has the promoter any track record to his credit in support of their claim. The company is yet to get a foot-hold in its business. As a matter of fact, the start-up entity is going to be just an importer and distributor of some Chinese products!

 

People Behind

VDM has been promoted by Hardik Sanghvi (35), B. E. (Electronics & Communications), Shripal Bafna (26), MBA, and Sanjay Vardhan (40), B. Com., engaged in real estate business. The promoters claim that, with over 30 years of combined experience, they would grow into a globally recognized brand. However, they have no proven record to justify their claim. Two group companies viz. VMukti Solutions Pvt. Ltd and Adiance Technologies Pvt. Ltd, engaged in similar activity, had combined revenue of less than Rs 8 lakh in fiscal 2012!

 

Concerns

For a company and promoter who have no financial track record to boot, the premium of Rs 15 per share is grossly unjustifiable. In fact, the company had allotted 77.50 lakh shares (50% of the equity capital) at par value just five months earlier.

VDM’s business is highly dependent on its promoter Hardik Sanghvi. But, he is subscribing to only 1.5 lakh shares (less 1% of the post-issue equity of Rs 15.50 cr)! The marketing company which dreams big has only five permanent employees including the CEO!

The public company has agreed to pay “Technology Software Service Charges” at the rate of Rs.10 lakh per month (Rs 1.2 cr for the year) or 4% of gross sales which ever is higher for the first 12 months, and thereafter 4% of gross sales, to a group company viz. VMukti Solutions whose credentials are far from convincing.

VDM is going to import its products from China/Hong Kong.  Should there be any adverse change in Government Import Policy, it could affect the company’s business badly. More over, the company has not placed firm orders for import of all the products to be held in stock. Any currency fluctuation (depreciation of rupee against US$) could increase the cost of products and adversely affect the profit margins.

Of the Rs 7.5 cr equity capital already raised largely through private placements, as much as Rs 7 cr has been lent to two unknown entities, I-Zone Academy Pvt. Ltd and Krone Finstock Pvt. Ltd, as inter corporate deposits (ICDs)! If a trading company that requires a working capital of more than Rs 25 cr were to park Rs 7 cr in ICDs, why do they require a public issue before starting operations?

The registered office of the company has been changed twice in just five months!

 

Manager’s Track

VDM’s issue is lead-managed by a relatively low profile Mumbai-based investment banker, Networth Stock Broking. The last IPO brought out by Networth was Monarch Health Services in May last year. This company changed its name to Looks Health Services within a year of going public. The scrip is currently quoting at its historical peak of Rs 335 (for Rs 10 paid-up) though operationally it reported Rs 1.22 cr loss for fiscal 2013! Also, for reasons best known only to the management, the company proposed to split its share from Rs 10 to Re 1 in April 2013 which is yet to be effected. How a loss making company is quoting at an exorbitant price and the reason for stock split are worth investigating.