Has BSE forgotten GCM’s track?

Notwithstanding tricky past, the promoters of Global Capital Markets (GCM) are out in the market to tap public funds. Interestingly, BSE, which has a serious reservation with GCM on name change, is entertaining the promoters by facilitating its SME platform for their dubious move!

In the eighties many a market commentator branded Asia’s oldest stock exchange (BSE) as a ‘gambling den’ which eventually led to the creation of NSE. As NSE has taken a major chunk of its business, BSE now seems to invite all & sundries to list on its platform with a sole objective of earning some fee-income! In the process, BSE is once again allowing itself to be a ‘gambling den’ for some notorious promoters. GCM is one such case.

During the peak of mid-nineties’ primary market boom, a little known company in the name of Global Capital Markets Ltd  (GCML) promoted by a Chartered Accountant, Inder Chand Baid, hit the market with an IPO of Rs 4 cr (which was a big amount then). Despite being in operation for more than five years and having paid dividend for last three years, the company offered its shares at par. GCML’s board boasted of having people like S.R. Sengupta (consultant to Asian Development Bank) and P.D.Ojha (former Deputy Governor of RBI). The offer document claimed that the promoters would hold 43.5% of the post-IPO capital. The issue was lead-managed by the duo Arihant Credit Capital and ITC Classic Finance who are nowhere in the scene today.

Eighteen years after, the same promoters are entering the primary market once again, this time, under the banner GCM Securities Ltd (GSL). Whereas GCML had promised to undertake stock broking and investments among others, GSL claims to focus only on stock-related activities. In other words, GSL will be in a way competing with its parent company GCML. How will GSL perform? GCML’s performance may throw some light.   

At the time of going public GCML had a top line of about Rs 1.5 cr (annualized) on which it netted a profit of Rs 1.25 cr. The company proposed to have a capital of Rs 7.08 cr post-IPO. The capital was increased to Rs 23.70 cr by 2010 but the top line was worth only Rs 1.35 cr on which it netted Rs 27 lakhs yielding an EPS of just Rs 11 paise. Surprisingly, in the next fiscal, capital was increased by Rs 1.2 cr at a hefty premium of Rs 12 cr. The company’s revenue leapt ten times to Rs 13.4 cr in that year but, net profit amounted to only Rs 70 lakhs yielding a negligible EPS of 3 paise. In fiscal 2012, revenue increased by Rs 6 cr to Rs 19 cr and profit moved up from Rs 28 lakh to Rs 98 lakh netting an EPS of 4 paise.

In recent years GCML’s net operating cash flow has never been positive. Its share price has been abnormally high though the EPS has been dismal. The company adopted tactics like stock split, stock consolidation and change of name (sounding like an Infra co) to keep the stock more active.  Currently, the share is quoting at more than Rs 145. For a stock whose EPS is only just 40 paise, how could it command such an exorbitant price?

GCML scrip has had a highly fluctuating past. The share which was offered at Rs 10 went as low as Re 1 in 2004. For many years the scrip was languishing far below par value. Suddenly in 2010, it hit a century which was followed by a 10:1 split! In 2012, it crossed Rs 20 (equivalent to Rs 200 pre-split). This was followed by the consolidation 1:10 which took the price further up to Rs 273! However, within a month the price crashed to Rs 145. Surprisingly, the regulators have turned blind eye.     

At the time of going public, the promoters promised to hold more than 43% of the equity. But, now they hold just 5%! How do the promoters control a company with such an abysmal stake? Interestingly, as many as 364 unknown private companies classified under the ‘public category’ are collectively holding about 30% of GCML’s equity. What’s the connection between these closely-held companies and GCML promoters is worth looking into. Also, if the core promoters were to dilute their stake from 43.5% to just 5% in their first public venture, why should they float a second company public with 39% stake?    

As regards the promoters’ corporate governance and BSE’s experience, GCML’s shares were suspended from October 2005 and trading recommenced only in July 2007. What’s more, GCML changed its name to Global Capital Market & Infrastructure Ltd in June 2010. But, BSE refused to recognize the company’s move and still continues to display the company’s old name citing that the company had not complied with the listing agreement which required that at least 50% of the total revenue in the preceding year should have been from new activity suggested! Despite GCML’s dismal track, questionable credentials and non-compliance of listing guidelines, BSE has admitted GSL on its SME platform though the latter’s prospects are no better than parent.

 

Manager’s Track

GSL’s is the second IPO lead-managed by Inventure Merchant Banker. Incidentally, the Mumbai-based investment banker’s first IPO (Bronze Infra-Tech) too was from the “City of Joy”! Bronze’s IPO was made at a price of Rs15 in October 2012. Currently the share is languishing at less than half of the offer price.

 

Present Offer

GSL is making a fresh issue of 60.9 lakh shares of Rs 10 each at a fixed price of Rs 20 a piece aggregating to Rs 12.18 cr. On the post-IPO equity of Rs 18.99 cr, the promoters will have a minority stake of Rs 41.55% (which is less than even what the parent company had proposed at the time of going public – 43.5%). What’s more intriguing is, the company issued shares at Rs 50 each in September 2005 and seven and a half years later it is offering a heavily discounted price of Rs 20! How come those who subscribed @ Rs 50 in 2005 are keeping quiet now?   

OFFER AT A GLANCE
Issuer Name	GCM Securities Ltd
Offer Amount	Rs 12.18 cr
Offer Quantity	60.9 lakh shares of Rs 10 each
Offer on Total Equity	32.1%
Post-issue Free Float	58.45%
Post-issue Promo stake	41.55%
Post-IPO Capital	Rs 18.99 cr
Offer Price	Rs 20
Application Quantity	6,000 & Multiples of 6,000
Offer Opens	March 18, 2013
Offer Closes	March 20, 2013
Listing	SME Platform of BSE
Rating	Nil
Lead Manager	Inventure Merchant Banker
Registrar	Purva Sharegistry

 

Valuation 

There are umpteen brokerages in the listed domain today, a majority of them being loss-making. But, that does not deter GSL from asking a premium of Rs 6.09 cr from the public. How does it justify a price of Rs 20 and how will it service a large equity of Rs 19 cr? For fiscal 2012, the seventeen year-old company’s operating income amounted to only Rs 36 lakh! With the help of other income of Rs 37 lakh, GSL posted a net profit of Rs 22 lakh. In the first six months of fiscal 2013, its profit has leapt to Rs 2.74 cr. Will it sustain such incredible performance post-issue? The track record of GCML gives enough indication of what’s in store for investors of GSL!  

HOW GCM SECURITIES COMPARES WITH SECOND-RUNG BROKERAGES
CO_NAME	M-CAP	TTM PE	P/BV	P/FV	P/R	YIELD	PRICE
	(Rs Cr)	(x)				(%)	(Rs)
Aditya Birla Money	93	–	3.1	16.9	1.3	0	16.85
Fortune Financial	81	–	0.8	6.3	45.5	0.8	62.60
Inventure Growth	58	47.4	0.4	0.7	2.8	3.6	6.94
Emkay Global	42	–	0.3	1.7	0.5	2.9	17.15
Action Financial	27	–	1.8	2.2	9.2	0	21.90
JRG Securities	19	–	0.3	0.8	1.0	0	8.20
Oasis Securities	18	2.7	2.3	10.0	2.4	0	99.75
Networth Stock	18	4.4	0.6	1.6	0.9	0	15.75
BLB	16	–	0.1	3.0	0.1	3.3	3.04
Vertex Securities	15	–	1.7	1.7	1.9	0	3.46
Indo Thai Sec	11	–	0.3	1.1	1.6	0	11.05
Swastika Invest	11	10.7	0.9	3.6	0.9	2.8	35.80
Joindre Capital	10	6.7	0.3	0.8	0.7	0	7.54
CIL Securities	5	7.5	0.3	1.1	1.2	4.7	10.76
Sugal & Damani	5	12.4	0.7	0.8	1.2	1.2	8.14
Munoth Financial	5	–	0.7	1.0	12.4	0	9.88
Minolta Finance	4	–	0.4	0.4	145.7	0	4.37
Centerac Techno	4	–	0.3	0.4	1.6	0	3.55
Bharat Bhushan	3	7.1	0.4	0.8	4.0	5.9	8.43
Inani Securities	3	23.3	0.2	0.6	2.1	0	6.12
GCM Securities	38	30.1	0.8	2.0	106.9	0	20.00