Notwithstandinggroup’s `market making’ skill, stagnant business, negative cash generation from operations and bleak dividend prospects make the IPO passable.

OFFER AT A GLANCE
Issuer Name	SRG Securities Finance Ltd
Offer Amount	Rs 5.02 cr
Offer Quantity	25.08 lakh shares of Rs 10 each
Offer on Total Equity	64.7%
Post-issue Promo stake	43.1%
Post-IPO Capital	Rs 3.88 cr
Offer Price	Rs 20
Application Quantity	6,000 & Multiples of 6,000
Offer Opens	October 7, 2013
Offer Closes	October 14, 2013
Listing	SME Platform of BSE
Rating	Nil
Lead Manager	Aryaman Financial Services
Market Maker	ISJ Securities
Registrar	Sharex Dynamic

 

The Offer

SRG Securities Finance Ltd (SSFL) is making a fresh issue of 25.08 lakh shares of  Rs 10 each at a price of  Rs 20 per a piece aggregating to Rs 5.02 cr. Of this, 3.9 lakh shares (Rs 78 lakh) are reserved for promoters and 1.38 lakh shares are earmarked for the `market maker’ ISJ Securities. The entire net public issue portion of 19.8 lakh shares is underwritten by the lead manager, Aryaman Financial Services. Minimum application amount has been kept at Rs 1.2 lakh (6000 shares). The shares are to be listed on the SME Platform of BSE.

 

Issue Object

The main object of the IPO is to augment capital base for increasing operational scale in the field of NBFC activities.

 

Background

SSFL is a part of the Udaipur-based SRG group controlled by Jains. SRG group is not new to investors. In August 2012 the group’s maiden IPO was floated by SRG Housing Finance Ltd (SHFL). Incidentally SHFL’s Rs 7 cr public issue too was priced at a similar premium of Rs 10 per share. Also, SHFL’s IPO was handled by the same issue manager-registrar-market maker combine.

The group has many companies engaged in the NBFC domain. Whereas SHFL is reportedly concentrating on housing finance, SSFL is engaged primarily in the business of asset financing by offering business loans, equipment and machinery loans, vehicle loans, etc. Nevertheless, none of the group companies has achieved sizeable scale of operations. Their maiden public venture, SHFL has top line of just Rs 2.34 cr as compared to its capital of over Rs 8 cr even after thirteen years. Its current bottom line (less than Rs 64 lakh) indicates that the company still has to go a long way for paying a decent dividend.

SSFL was originally incorporated by M/s. Bajrang Lal Gupta, Ramesh Kumar Gupta and Vinod Kumar Gupta in the year 1995. The control of the company was taken over by the Jain family in the year 1999. After 18 long years, SSFL’s revenue has crossed the Rs 1 cr mark for the first time in fiscal 2013.  Even though the company has deployed more than Rs 5 cr into its operations, its net profit was only Rs 15 lakh in fiscal 2013. What’s still worse was, the company had negative cash flow from operations during the four fiscals up to 2013.   

 

Prospects

SSFL promises to increase its operating efficiencies and scale thereby becoming a notable player in the asset finance field in the country. Nonetheless, its recent performance does not exude much optimism. Its loan portfolio was almost stagnant around Rs 4.5 cr for three years. This implies that the company faced significant competition in the businesses that it is involved.

Post-IPO, the company would have a capital base of Rs 3.88 cr. First quarter of current fiscal indicate a bottom line of Rs 25 lakh yielding an EPS of 64 paise which discounts the offer price more than 31 times. When the average cost of acquisition of shares by the promoters is only a fourth of the public, what are the prospects for capital appreciation? The group’s maiden venture may give a clue.

As stated earlier, in August last year, SHFL too offered at the same price discounting its pre-IPO EPS of Rs 1.14 about 18 times. The EPS dipped to 98 paise in fiscal 2013 on the expanded capital of Rs 8.08 cr. But, despite carrying no dividend, SHFL’s price has shot up to Rs 107 albeit irregular trading in the run up to the group’s second public issue. When many a hefty dividend-paying NBFC is currently languishing in single digit P/E, SHFL’s ruling at an incredible P/E of more than 100x amply demonstrates the `market makers’ are acting well!