Will employees-turned-entrepreneurs fare different from their former employer?

During the height of the mid-nineties’ unprecedented primary market boom (in February 1995) a little known company, Shree Pomani Metals & Alloys Ltd, engaged in the business of aluminum ingots and extrusions tapped the capital market at a premium of Rs 5 per share. Pomani could even rope in a respectable name like SBI Cap to manage its issue. For first few months Pomani managed to quote above its offer price and then met with the same fate as many a boom-time-bloomer witnessed. Since 2002 Pomani has not been traced on the trading screen, leave alone fetching any return. More than a decade after Pomani’s vanishing act, its former employees are floating public Bothra Metals.

OFFER AT A GLANCE
Name	Bothra Metals & Alloys Ltd
Public Offer	Fresh issue of 25.92 lakh shares and sale of 22.92 lakh existing shares
Offer Price	Rs 25
Offer Amount	Rs 12.21 cr
IPO% on Total Equity	26.4%
Post-IPO Free Float	26.4%
Application Quantity	6000 & Multiples of 6000
Bid/Offer Opens	March 12, 2013
Bid/Offer Closes	March 14, 2013
Listing	SME Platform of BSE
IPO Grading	Nil
Lead Manager	Sarthi Capital
Registrars	Sharex Dynamic

 

Public Offer

Bothra Metals is making a public offer of 48.84 lakh shares of Rs 10 each at a fixed price of Rs 25 a piece aggregating to Rs 12.21cr. The offer consists of fresh issue of 25.92 lakh shares from the company and `offer for sale’ of 22.92 lakh shares from the promoter group. Of the public offer, 2.52 lakh shares are reserved for the `market makers’ to the issue, Choice Equity Broking. The entire issue has been underwritten by the lead-manger, Sarthi Capital Advisors (59.05%), and the market maker (40.95%). Applicants to this issue should apply for a minimum of 6,000 shares (Rs 1.5 lakh). The shares are to be listed on the SME platform of BSE.

 

Issue Objective

The main objects of the IPO are to fund the working capital requirement (Rs 6 cr) and achieve the benefits of listing on the stock exchange. The company had earlier filed the Draft Red-Herring Prospectus (DRHP) with SEBI proposing to list the issue on the Main Board of BSE. In fact, SEBI issued its final observations vide letter dated April 02, 2012.  However, post-amendment of SEBI Regulations which became effective in October, 2012, BMAL reportedly could not meet the amended criteria for Main Board IPO. Consequently, the company withdrew its DRHP from SEBI and BSE in January 2013. Thereafter, the Company decided to proceed with the Issue on the SME platform of BSE.

 

Untested Management 

Bothra Metals & Alloys Ltd (BMAL) has been promoted by Sunderlal Bothra (41 years) and his brothers Narendra Bothra (39) and Kishanlal Bothra (36) along with Sardarmal Suthar (42). Sunderlal and Sardarmal are ex-employees of Shree Pomani Metals & Alloys Ltd. Whereas Sunderlal, a commerce graduate, was the accounts head of Pomani Metals, Sardarmal, a matriculate was the Purchase Manager. The duo roped in former colleagues, K.M.A. Menon (56) and H.A. Mhetar (63), who were working as Chief Executive and Sales Executive respectively at Pomani.

Interestingly, BMAL’s board is headed by a much younger independent Non-executive Director, Nirmal Daga (31) who is said to be a full time employee of an MNC, Schneider Electric India! The Chief Financial Officer too is only 24 years old and its Company Secretary is just 22 years. The company’s board has as many as eight directors but none of them, except one chartered accountant, has other directorships. 

 

Financial Track

Despite having three manufacturing units, BMAL has remained predominantly a trading company till date. Trading accounted for more than 63% in fiscal 2012. The company’s first unit located in Himachal Pradesh was established in 2007. This has a capacity of 4000 TPA of aluminium extrusions, aluminium profiles and aluminium billets.  Its second unit for 600 TPA aluminium ingots and aluminium shots was set up in Gujarat in 2010. The company has recently commissioned its third unit at Sangli (Maharashtra) with a capacity of 2,400 TPA of aluminium extrusion and 7,500 TPA of non-ferrous metal alloy products. Even though the company has gone for major capacity addition this year, its capacity utilization has never exceeded more than 59% in last four years.

The company’s manufacturing sales have steadily increased from Rs 16 cr in fiscal 2008 to Rs 41 cr in 2012. Trading during this period has grown from Rs 34 cr to Rs 71 cr. As trading dominated sales, the operating margin has remained as low as 6%. Against an equity capital of Rs 15.92 cr, the bottom line stood at Rs 3.53 yielding an EPS of Rs 2.22. However, the highly fluctuating profitability is a cause for concern.    

 

Prospects 

BMAL is poised to derive the benefits of its third manufacturing unit from the fiscal 2014. Also, the company intends to go for more value addition to its existing products which would enable the company to address the consumer directly and enhance visibility of its brand. This should result in a significant increase in profitability. In other words, the company’s future does look better than its past. But, the moot question is, when will it return to the dividend list and adequately service the large equity base of Rs 18.51 cr?

 

Valuation 

BMAL is asking a price of Rs 25 which values the company’s market cap at Rs 46 cr which certainly looks very steep as compared to the industry’s current valuation. Century Extrusion, despite having a net block of Rs 42 cr is valued just Rs 11 cr at a P/E of Rs 3.4x and P/BV of just 0.3x. The only dividend paying company in the industry, Sudal Industries’ market cap is at only Rs 8 cr though its net block is more than Rs 94 cr. BMAL has a net block of Rs 7 cr which discounts its m-cap more than 6 times.

The average cost of promoters’ holding is only between Rs 2.77 and Rs 7.22 which will be reduced significantly after the offer for sale by the promoters. In other words, after the lock-in period, the possibility of promoters dumping the shares at below IPO price cannot be ruled out.

HOW BOTHRA COMPARES WITH ALUMINIUM EXTRUSION PEERS
CO_NAME	M-CAP	PE	P/BV	OPM	N BLOC	YLD	PRICE
	(Rs Cr)	(x)		%	(Rs.Cr)	(%)	(Rs)
Century Extrusion	11	3.4	0.3	5.9	42	0.0	1.40
Alumeco India	10	–	–	0.6	6	0.0	7.83
Sudal Industries	8	12.1	0.5	6.8	94	6.9	14.60
Maan Aluminum	7	16.5	0.3	3.8	21	0.0	21.00
Bhoruka Alum	7	–	0.1	–	52	0.0	1.26
Bothra Metals	46	11.3	1.9	6.1	7	0.0	25.00

 

Managers’ Track

BMAL has hired Sarthi Capital Advisors to manage its IPO. Incidentally, for the Investment Bankers, this will be the maiden lead-managing experience.