Wholesale paper trader wants public money to set up `corporate office’! If a company couldn’t earn enough in 13 years to buy an office of its own, what can it do for public shareholders? Also, why a trading company should spend Rs 10 cr on corporate office?

OFFER AT A GLANCE
Name	Kushal Tradelink Ltd
Offer Amount	Rs 27.76 cr
Offer Quantity	79.30 lakh shares of Rs 10 each
Offer % on Total Equity	33.4
Equity Capital	Rs 23.73 cr
Offer Price	Rs 35
Application Quantity	4000 & Multiples of 4000
Offer Opens	August 14, 2013
Offer Closes	August 21, 2013
Listing	SME Platform of BSE
Lead Manager	Aryaman Financial
Market Maker	Aryaman Broking
Registrar	Bigshare Services

 

The Offer

Kushal Tradelink (KTL) is making a fresh issue of 79.28 lakh shares of Rs 10 each at a price of Rs 35 a share aggregating to Rs 27.75 cr. Whereas the lead manager, Aryaman Financial, has underwritten 95% (Rs 26.32 cr) of the IPO, an associate entity of the lead manager, Aryaman Broking, who acts as a market maker has committed 5% (Rs 1.43 cr). Investors should apply for a minimum of 4000 shares (Rs1.40 lakh).

 

Issue Object

Notwithstanding an issue size of about Rs 28 cr, KTL does not have a worthwhile project that warrants public funds. The main object of the IPO is stated to be “purchase and set up Corporate House” at a cost of Rs 10.01 cr which includes land cost Rs 6.03 cr. The company has earmarked Rs 15.75 cr for long-term working capital requirement and Rs 1.09 cr for general corporate purposes.

 

Background

The 2000-incorporated KTL is said to be one of the leading wholesalers in Ahmedabad. The company claims to have a client base of over 600 customers, making it a major player in the Paper and Paper Products market in Gujarat. KTL reportedly operates as an intermediary in the paper product supply chain whereby it purchases materials such as kraft paper, duplex board, etc. from individual paper mills and supplies the same to customers in the packaging segments. According to the offer document, the company has three godowns located in different regions of Ahmedabad. Besides stocking facilities, these godowns reportedly have certain processing facilities such as sheet-cutting, rewinding, bailing, reel to sheet making, etc. KTL now intends to increase its foothold in Gujarat besides entering into other states. It proposes to set up a new office facility at Ambawadi in Gujarat as a part of its expansion plans.

 

Financials

The promoters, Agrawal family, claim to have been in the business of paper trading since 1965. Earlier they reportedly handled the business under M/s Saraswati Trading Co. KTL was registered in the year 2000 and the company achieved a turnover of Rs 10 cr in 2003. In last five years, the company’s top line has grown from Rs 63 cr to Rs 244 cr. But, the profit margin has been poor. In fiscal 2011, on a turnover of Rs 113 cr, the company could not earn a profit of even Rs 1 cr. Next year, on Rs 185 cr sales, it netted Rs 1.39 cr. On the eve of the public issue, in fiscal 2013, the company’s bottom line climbed to Rs 4.09 cr on Rs 246 cr revenue.

As regards the capital build-up, KTL’s capital was less than Rs 15 lakh until 2004. In 2005, it added Rs 14 lakh at a premium of Rs 1.89 cr (Rs 135 per share). In 2006, another Rs 20 lakh was added at a premium of Rs 2.75 cr (Rs 135 per share). In 2007, it made one more preferential allotment of Rs 21 lakh at a premium of Rs 3 cr (Rs 140 per share).  In April 2009, the entire share premium of Rs 7.64 cr was capitalized thereby expanding the capital from Rs 71 lakh to Rs 8.5 cr. In March 2010, another preferential allotment of Rs 28 lakh was made at a premium of Rs 3.95 cr (Rs 140 per share). Interestingly, the entire premium was capitalized next year through another bumper bonus issue. Thus at the end of fiscal 2012, the company’s equity capital stood at Rs 15.80 cr while its reserves were hardly Rs 1.5 cr.

 

Valuation 

Whereas the average cost of holding works out to less than Rs 2 per share for the promoters, the company is asking for a price of Rs 35 from the public. The company’s bottom line reached a decent figure (Rs 4 cr) only last year that too with the help of an ‘other income’ of Rs 2 cr. The present bottom line yields an EPS of less than Rs 2 on the post-issue capital of Rs 23.73 cr. In the absence of any dividend, how such profitability can bring capital appreciation on the offer price of Rs 35 is anybody’s guess. 

The fundamentals of the company certainly do not exude optimism. Though the main object of the IPO is to establish a corporate office, they have not yet identified the exact property/land proposed to be acquired from the Issue proceeds. Proposed objects of the issue for which funds are being raised have not been appraised by any bank or financial institution. There could be conflicts of interest as closely held group entities too have similar line of business.