Increasing trading activity, wafer thin margin, group’s conflict of interest, poor corporate governance, etc., put B.C. Power in dim light.
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OFFER AT A GLANCE |
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Issuer Name |
B.C. Power Controls Ltd |
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Offer Amount |
Rs 10.37 cr |
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Offer Quantity |
57.60 lakh shares of Rs 10 each |
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Offer on Total Equity |
49.0% |
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Post-issue Promo stake |
51.0% |
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Post-IPO Capital |
Rs 11.76 cr |
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Offer Price |
Rs 18 |
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Application Quantity |
8,000 & Multiples of 8,000 |
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Offer Opens |
February 24, 2014 |
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Offer Closes |
February 28, 2014 |
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Listing |
SME Platform of BSE |
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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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Registrar |
Bigshare Services |
The Issue
The five year-old Delhi-based B.C. Power Controls Ltd (BCP) is making a fresh issue of 57.6 lakh shares of Rs. 10 each at a premium of Rs. 8 a piece aggregating Rs. 10.37 cr. The IPO constitutes 49% of the post-issue capital. The entire issue has been underwritten by the lead managers, Sarthi Capital Advisors of Mumbai. BCP is the 51st SME to hit the BSE platform and 5th in the kitty of the lead manager.
Issue Object
The main object of BCP’s IPO is to raise funds for working capital. The company proposes to utilize Rs 8.5 cr issue proceeds for working capital while Rs 1.32 cr is ear-marked for general corporate purposes.
Background
The promoter of BCP, Arun Kumar Jain, though new to the investing public, has quite a few closely held companies, some of them even competing with each other. However, none of the companies has a creditable track to speak about. What’s worse, the group companies have not even filed the annual documents with the RoC on time.
BCP was incorporated in 2008 for the manufacture and trading of power cables. Until March 2010 the company’s capital was only Rs 10 lakh. In March 2011, it issued shares at a premium of Rs 40 each to promoters and associates thereby increasing the capital to Rs 1.09 cr. Again in March 2012, BCP allotted more than 9 lakh share at similar premium and enhanced the capital to Rs 2 cr. In September 2013, the company rewarded a 2:1 bonus which enlarged the capital to Rs 6 cr. As of now the two individual promoters, Arun Kumar Jain (55) and Harshit Jain (19), hold about 42% while the promoters’ relatives and group companies hold the rest.
Financial Track
BCP claims to have a wide product portfolio which includes armoured cables, flexible and house wires, submersible cables, control and instrumentation cables. The company has a net worth of Rs 10.25 cr against which its gross fixed assets stood at Rs 6.65 cr at the end of September 2013.
The company’s top line has grown from just Rs 71 lakh in 2009 to Rs 104 cr in 2013. Nevertheless, the company has a dismal operating margin of less than 2%. In other words, the company has been hiking sales at the cost of its margin. In fact, the company’s operations in fiscal 2013 resulted in highly negative cash flow. The bottom line of the Rs 100 cr plus sales company is yet to reach half a crore-mark!
Prospects
BCP’s current profitability (Rs 32 lakh) is too small to service even its present equity (Rs 6 cr). Post IPO, the capital will increase to Rs 11.71 cr. The premium public issue may bring down the cost of operations to some extent. But, will it help to generate enough profits to adequately service the enlarged equity? The current operating margin of less than 2% does not exude much optimism. Thus, notwithstanding the issue premium, the company is unlikely to enter the dividend list in the foreseeable future. Another factor that cannot be ignored is the group companies’ conflict of interest which could jeopardize the future of the public company.
Valuation
Power cables and wires as such do not enjoy rich discounting on the trading floor. Many an established player with consistent dividend record is currently valued less than eight times the earnings. Considering the industry’s dismal discounting, BCP’s premium looks grossly unjustifiable. Moreover, the promoters cost of holding works out to between Rs 3.67 and Rs 14.19 as compared to the IPO price of Rs 18.
Investment Bankers’ Track
BCP’s merchant banker viz. Sarthi Capital has earlier brought out four SMEs on the BSE platform. While the first three are currently quoting at a premium, the last one is languishing 20% below the offer price. BCP indeed does not have the fundamentals to support the offer price but, one cannot rule out an artificial push in this counter on listing as the merchant banker has underwritten the entire issue of Rs 10.37 cr! Such manipulations often go unchecked on the country’s oldest stock exchange.
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IPOs Managed by Sarthi Capital Advisors |
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ISSUER |
IPO |
CURR |
GAIN |
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PRICE |
PRICE |
% |
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BOTHRA METALS |
25 |
27.00 |
8.0 |
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TIGER LOGISTICS |
66 |
72.50 |
9.8 |
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R J BIO-TECH |
20 |
34.70 |
73.5 |
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RCI INDUSTRIES |
40 |
32.00 |
-20.0 |