Questionable stake-shifting and pricing go unnoticed as `watch dog’ is into deep slumber!

OFFER AT A GLANCE
Name	Sunstar Realty Development Ltd
Offer Amount	Rs 10.62 cr
Offer Quantity	53.1 lakh shares of Rs 10 each
Offer on Total Equity	26.6%
Post-issue Free Float	77.4%
Post-IPO Capital	Rs 19.93 cr
Offer Price	Rs 20
Application Quantity	6,000 & Multiples of 6,000
Offer Opens	February 18, 2013
Offer Closes	February 21, 2013
Listing	SME Platform of BSE
Lead Manager	Guiness Corporate
Registrar	Sharepro Services

 

The Offer

The Mumbai-registered Sunstar Realty, whose activities are reportedly in the state of Gujarat, is making a fresh public issue of 53.1 lakh shares of Rs 10 each at a fixed price of Rs 20 a piece aggregating to Rs 10.62 cr. Of the Issue, 2.7 lakh shares (Rs. 54 lakh), is reserved for subscription by `Market Makers’ to the issue.

The IPO is lead-managed by Kolkata-based Guiness Corporate Advisors (until last month known as Guiness Merchant Banker) who has underwritten to the extent of 95% (Rs 10.08 cr). The investment banker’s associate, Guiness Securities is acting as `market maker’ underwriting the balance 5% (Rs 54 lakh). Subscribers must apply for a minimum of 6000 shares (Rs 1.2 lakh) and multiples thereof. The shares are proposed to be listed on the SME-Platform of Bombay Stock Exchange (BSE).

 

Issue Object

The objects of Sunstar IPO are to finance its business expansion plans and achieve the benefits of listing. Of the Rs 10.62 issue proceeds, Rs 4 cr is earmarked for financing the expenditure of work order awarded by Jain Infraprojects Ltd, Rs 5 cr is meant for development and construction-related expenditures of the company’s planned projects and Rs 1 cr is allocated for brand building and general corporate purposes.

 

Questionable Track

Sunstar was originally claimed to have been incorporated in 2008 by Sovan Dasgupta and Manjri Vijay Choudhary whose background is not revealed in the IPO document. The company did not achieve any credible financial performance in the first three years. Meanwhile, between 2011 and 2012 Kavita Patel and her husband Dipan Jesingbhai Patel have reportedly acquired the control of the company. Interestingly Kavita Patel had joined the company’s board in November 2010 and left in February 2011 only to re-join in July 2012!

Until March 28, 2012, the company’s authorized capital was just Rs 1 lakh! On 29th March, 2012, this was enhanced to Rs. 6.5 Lac. Just two days later, on 31st March, 2012, the authorized capital shot up to Rs. 600 lac. This was further increased to Rs. 1500 lac in September, 2012, and to Rs. 2050 lac in November, 2012. In other words, the company changed its authorized capital four times in less than a year! 

 

Valuation

Sunstar’s pre-issue equity capital stands at Rs 14.62 cr which is proposed to be increased to Rs 19.93 cr through the IPO. Until March 2012, the company’s end surplus was less than Rs 3 lakh and as on 30th September, 2012, its NAV was Rs 10.07. But, the company is asking for a premium of Rs 10 per share. How was this allowed? They say the promoters average cost of holding is close to Rs 20. How did the promoters acquire the shares at an unjustifiable premium?

On 29^th March, the individual promoters acquired 50,000 shares at par value. On 31^st March 54.50 lakh shares were issued at par to the following eight closely held companies whose ownership is not disclosed: Akriti Advisory Services (15,10,000 shares), Ford Dealcomm (4,00,000), Supernova Advertising (23,40,000), Prism Fincom (50,000), Appear Commodeal (1,90,000), Overflow Merchandise (5,00,000), Vital Vintrade (3,10,000) and Sarvottam Advisory (1,50,000). Just a month later, the promoter company acquired 44.4 lakh shares from these unknown companies at a premium of Rs 10 each. In other words, the issuer company did not receive any premium though the promoters claimed to have paid a premium of Rs 4.4 cr. Why should they pay such a hefty premium to crony companies who had acquired the same shares at par only a month earlier?  It is indeed worth investigating the background of the stakeholders of these crony companies to whom the promoters have paid hefty premium without any basis.   

The so-called promoter company, Heaven Petrochem, too has an interesting reading. This company, which claims to have invested Rs 8.8 cr in Sunstar’s equity, had a net worth of not even Rs 1 lakh at the end of last fiscal. Its revenue was just Rs 15000 in fiscal 2012! Incidentally, Heaven Petrochem too was promoted by someone else in 2010 and was acquired by the Patels only in March 2012.

 

Prospects

Sunstar’s offer document claims that the company was engaged in development, sale, and lease of commercial, residential, retail, and industrial properties and its project portfolio primarily comprised residential projects and commercial projects. They also claimed to have engaged in land development, construction and execution of infrastructure projects. Nevertheless, at the end of fiscal 2012, its top line was just Rs 34 lakh on which it posted a profit of Rs 5.55 lakh against an equity base of Rs 551 lakh. For the first six months of current fiscal, the company has reported a top line of Rs 2 cr and a net profit of Rs 14 lakh on an equity capital of Rs 14.62 cr. Post-issue, the capital will increase to Rs 19.93 cr. How will it service such a large capital base? The company’s fundamentals and its proposed funding plans do not provide a convincing answer.

 

Investment Banker’s Track

Sunstar is registered in Mumbai and its projects are said to be in Gujarat. But, its IPO is lead-managed by the Kolkata-based Guiness Corporate Advisors. Interestingly, Guiness is the most active merchant banker in bringing out SME IPOs. Until very recently it was known as Guiness Merchant Bankers whose name was changed as per the RBI’s diktat. Since, September 2012, this is the fourth IPO managed by Guiness. Though two of three IPOs handled by Guiness boast of decent premium over their offer prices, the quality of the issues brought out by the investment banker is far from convincing.  

IPOs HANDLED BY GUINESS CORPORATE
ISSUER	IPO	SIZE	RETAIL	FV	IPO	CUR.	GAIN
	DATE	Rs.Cr	Appli. Nos.	Rs	PRICE	PRICE	%
RCL Retail	27-Sep-12	5.80	219	10	10	9.20	-8.0
Eco Friendly Food	27-Dec-12	7.52	375	10	25	31.00	24.0
Esteem Bio Organic	18-Jan-13	11.25	450	10	25	30.60	22.4