Quality of SME IPOs entertained by the country’s oldest stock exchange, as compared to its rival NSE, leaves much to be desired. Is BSE-SME Platform becoming a `gambling den’ for the `club class’ fly-by-night operators? Kavita Fabrics exposes how utterly incompetent are our market regulators! 

OFFER AT A GLANCE
Issuer Name	Kavita Fabrics Ltd
Offer Amount	Rs 5.10 cr
Offer Quantity	12.75 lakh shares of Rs 10 each
IPO on Total Equity	36.7%
Post-IPO Free Float	64.1%
Post-IPO Promo Stake	35.9%
Post-IPO Capital	Rs 3.47 cr
Offer Price	Rs 40
Application Quantity	3,000 & Multiples of 3,000
Offer Opens	February 20, 2013
Offer Closes	February 22, 2013
Listing	SME Platform of BSE
Rating	Nil
Lead Manager	Intensive Fiscal
Registrar	Bigshare Services

 

The Offer

The 2005-registered Surat-based Kavita Fabrics Ltd (KFL) is making a fresh public issue of 12.75 lakh shares of Rs 10 each at a fixed price of Rs 40 a piece aggregating to Rs 5.10 cr. Of the issue, 2.07 lakh shares (Rs. 54 lakh) are reserved for subscription by `Market Makers’ to the issue.

The lead-manager to the IPO, Intensive Fiscal Services, has underwritten to the extent of 83.76% (Rs 4.27 cr). An associate of the lead-manager, Intensive Softshare, and K.M. Jain Stock Brokers are acting as `market makers’ underwriting 15.29% (Rs 78 lakh) and 0.94% (Rs 4.80 lakh) respectively. Subscribers must apply for a minimum of 3000 shares (Rs 1.2 lakh) and multiples thereof. The shares are proposed to be listed on the SME-Platform of Bombay Stock Exchange (BSE).

 

The Object

Of the Rs 5.10 cr issue proceeds, Rs 3.5 cr is earmarked for long term working capital requirement, Rs 1.2 cr is allocated for `general corporate expenses’ and Rs 40 lakh is meant for issue expenses.

 

Manager’s Track

KFL’s IPO is lead-managed by Mumbai-based Intensive Fiscal Services who has managed just two public issues in last three years. While the last IPO managed by them, Prakash Constrowell, has yielded decent returns to investors, the earlier one viz. Inventure Growth has a dismal record. The scrip, issued at Rs 117 in July 2011, almost doubled to Rs 232 within two weeks of listing in August 2011. This was followed by a bumper 3:1 bonus issue! Post-bonus, once the lock-in period lapsed, the price started moving southwards. Today, it is available at below par that is more than 67% below the adjusted IPO price!

Intensive Fiscal-associated recent IPOs
ISSUER NAME	IPO DATE	FV Rs	IPO PRICE	CURR. PRICE	GAIN %
Inventure Growth	20-Jul-11	10	29.25	9.47	-67.6
Prakash Constrowell	19-Sep-11	1	13.80	19.40	40.6

Price adjusted to bonus & stock split

 

Promoters’ Unassuming Stake

Though only 37% of KFL’s equity of Rs 3.47 cr is now offered to the public, the promoters’ post-IPO stake would be less than 36%! In fact, if the various benefits of related-party transactions like job work to group firms, asset purchases, loan given, properties taken on lease, etc., etc. were adjusted, the cost of holding of the promoters would be negligible as compared to the IPO price of Rs 40 per share. 

 

Baseless Pricing & Claims

On what basis is KFL asking for Rs 40? The management and the merchant bankers present the company as a synthetic fabrics manufacturer and want to compare with Garden Silk Mills Ltd. Surat may be the common base for both KFL and Garden. But, does that make any sense for a comparison? Garden is Rs 3700 crore-plus company whereas KFL’s turnover is just Rs 3 cr! Moreover, fabrics contribute only about 5% to Garden’s sales while poly chips and yarns account for more than Rs 3500 cr. Another company that KFL presents as a peer is Gini Silks. But, actually, Gini is a textile processor (dyeing) while KFL is engaged in weaving of grey fabrics.

KFL’s offer document claims that just five customers of the company accounted for 100% of its turnover. Who are these customers? The representative of the company as well as lead-managers boasts that they did not want to reveal the customers’ name for want of business secrecy. They claim that the details of the customers, who are south-based wholesalers, were already provided to the BSE for vetting. Has the one who vetted the offer document at BSE bothered to verify the facts?

The `related-party-transaction’ disclosures made in the offer document reveal that KFL sold Rs 2.14 cr (out of the total sales of Rs 2.25 cr) in FY-11 and Rs 3.32 cr (against Rs 3.13 cr sales booked) in FY-12 to its own group (proprietary) firm Ayush Creation (which has since been acquired by KFL itself. If almost the entire sales were booked through a group firm, whom are they fooling by claiming that `top five customers accounted for 100% of KFL’s sales? 

In five years, KFL could reach turnover of only Rs 3.13 cr. Its earned surplus at the end of five years was just Rs 7 lakh. Then on what basis the company has been allowed to charge the IPO premium of more than Rs 3.82 cr?  The regulators who have hand-in-glove operations with the fly-by-night promoters may argue that, in August 2012, the company had already charged a premium of Rs 30 per share to a public shareholder and collected Rs 3.80 cr.

 

Questionable `Public’ Stake 

Who is that magnanimous `public shareholder’ from whom KFL got a hefty premium for a worthless share? Believe it or not, except the name (Lakhotia Polyester Ltd), the regulators did not deem it fit to force the issuer to reveal about the so called public shareholder who holds more than 43% of KFL’s pre-issue equity, and would continue to hold more than 27% post-IPO!

What’s the background of KFL’s existing public shareholder, Lakhotia Polyester Ltd (LPL)? This is a closely-held company of a Nashik-based group controlled by one Madhsudan Lakhotia. LPL was formed in 2005 by converting the proprietary operations of Lakhotia’s firms. However, LPL’s website does not reveal the financials of the company. How did LPL fund its investment in KFL and what is the source of its funds?

An interesting aspect is that Lakhotia had invested Rs 3.8 cr into KFL in August 2012 and around the same period, KFL invested about Rs 4 cr into Bonanza Capital Markets Private Ltd! Why should a company starving for public funds for its operations, park its funds in a private company that too as `non-current investment’? Therefore, it is worth looking into the links of Lakhotia, KFL and Bonanza. Sebi, are you listening? And, if Sebi is genuinely interested in bringing back retail investors to the market, it should ban the investment bankers who convert SME Platforms into gambling dens for select `fly-by-night’ club members!