What can one expect from a company that has changed auditors four times in 3 years?

Even while the two `book-building’ IPOs of fiscal 2014 have bombed on the main frame, SME platform, mainly of BSE, is witnessing a flurry of activity as the market regulators have no mechanism to checkmate the unscrupulous fly-by-night operators from fooling the investing public. In last two months alone eleven SMEs (10 on BSE and just 1 on NSE) have hit the market taking the total to 64 (59 on BSE and 5 on NSE) in two years as compared to only 2 main frame IPOs during the same period which too failed to pass the muster. What sort of SMEs that the country’s premier stock exchange entertains is elucidated by Women’s Next Loungeries Ltd.

Exactly a year ago, on March 28, 2013, Ashapura Intimates Fashion Ltd hit the market with a public issue Rs 21 cr offering Rs 10 paid-up shares at a price of Rs 40 a piece. Ashapura’s operations had never generated net-cash and it had very poor record on the corporate governance front. Yet, the IPO was a grand success and the market makers have managed to take the price beyond Rs 120 (yielding an appreciation of more than 200%) discounting its first half of fiscal 2014 earnings more than 50 times!

Even before Ashapura reports its first full year performance post-IPO, Women’s Next Loungeries Ltd (WNL), whose factory is just adjacent to Ashapura’s unit in Bhiwandi and who claims to sell its entire production under Ashapura’s brand name, is raising Rs 6.5 cr at a price of Rs 65 a share. What’s more intriguing is, the 2010-registered WNL boasts of wholly catering to Ashapura yet, such vital disclosure was not made in Ashapura’s offer-document last year.

Interestingly, Ashapura’s promoter Harshad Thakkar has given guarantee and provided his own assets as security for WNL’s loan. Also, the offer document of WNL presents Bhavesh Bhanushali (37) as the promoter of the company. But, the fact is until September 2012, Harshad Thakkar’s mother Harshaben Thakkar was the main shareholder of WNL! These disclosures indicate that Ashapura’s Thakkars have considerable influence over WNL. The question here is, when Ashapura itself has raised money to fund a women’s innerwear project among other things, how are they helping WNL in raising Rs 6.5 cr to fund a similar project? The credentials of WNL can be summarized in one line. The company has changed its auditors as many as four times in three years!   

OFFER AT A GLANCE
Name	Women’s Next Loungeries Ltd
Offer Amount	Rs 6.5 cr
Offer Quantity	10 lakh shares of Rs 10 each
Offer on Total Equity	40%
Free Float	40.1%
Post-issue Promo stake	59.9%
Post-IPO Capital	Rs 2.5 cr
Offer Price	Rs 65
Application Quantity	2,000 & Multiples of 2,000
Offer Opens	March 28, 2014
Offer Closes	April 4, 2014
Listing	SME Platform of BSE
Rating	Nil
Lead Manager	Pantomath Capital
Registrar	Link Intime

 

The Offer

Fresh issue of 10 lakh equity shares of Rs 10 each at a price of Rs 65 a piece aggregating to Rs 6.5 cr. The issue comprises of net public offer of 9,48,000 shares and a reservation of 52,000 shares for the market maker. The issue will constitute 40% of the post-IPO capital of the company. The Mumbai-based Choice Equity Broking Pvt Ltd has been appointed as ‘Market Maker’. The issue lead manager, Pantomath Capital Advisors, has fully underwritten the IPO.

 

Issue Object

While the main object of the Rs 6.5 cr issue is to repay the Punjab National Bank loan (Rs 3.5 cr), the company proposes to utilize Rs 1 cr for upgrading its manufacturing facility and Rs 1 cr for working capital.

 

Background

Originally incorporated as Shree Shiv Lingeries Private Limited in December 2010, the company reportedly commenced production in early 2011. The company’s name was changed to the present one only in September 2013. Currently, WNL has an equity base of Rs 1.5 cr. Bhavesh Bhanushali and his relatives collectively hold around 99%. The promoters propose to hold a little over 59% in the post-issue equity of Rs 2.5 cr.

WNL claims to specialize in women’s inner wear segment undertaking designing, manufacturing,  branding and marketing of lingerie wear, honeymoon set, intimate wear etc. (almost similar to Ashapura’s product range). The company reportedly sells its products through the brands ‘Valentine Pink’ and ‘Womens’ Next’. However, according to the lead manager, the company currently sells its entire production to Ashapura.

 

Financial Track

For the first full year of operations ended March 2012, WNL logged a turnover of Rs 22.36 cr. However, cost of materials consumed for fiscal 2012 was Rs 23.37 cr that is more than the sales! With an increased inventory, the company posted a profit of Rs 42 lakh against a capital of Rs 50 lakh. In fiscal 2013, sales increased to Rs 32.23 cr, cost of materials too went up to Rs 32.62 cr and the company reported a net profit of Rs 68 lakh adjusting the inventories. Incidentally, the promoters’ proprietary firm, Shree Shiv Apparels, netted a profit of Rs 28 lakh on a turnover of Rs 30 cr in fiscal 2012 and a lesser profit of just Rs 11 lakh on a turnover of Rs 34 cr in fiscal 2013. Like Ashapura, WNL too has never netted cash generation from operations. The unusual high ‘Receivables’ and ‘Payables’ give enough indication that the sales and profits were mere book entries!   

 

Valuation

Whereas the promoters’ average cost of holding is just Rs 3.33, they are asking the public to shell out Rs 65 for the share. The company’s fiscal 2013 bottom line (Rs 68 lakh) discounts the valuation about 24 times. Profit in the first half of fiscal 2014 (Rs 48 lakh) gives a P/E multiple of about 17. 

Inner wear manufacturers do command a healthy discounting on the Indian bourses which may perhaps justify WNL’s discounting. Nevertheless, the company’s lackadaisical fundamentals, quality of its current earnings, absence of dividend, conflict of interest with group company, poor corporate governance, undisclosed connections with Ashapura, and promoters’ low cost of holding (Rs 3.33) make one skeptical about the long term prospects of Women’s Next.

How Women’s Next compares with inner wear peers
(Amount in Cr)	M-Cap	EQ	SALES	P/E	OPM%	YLD%	Price
Page Industries	7,203.75	11.15	1,104.45	50.6	19.8	0.8	6,458.50
Rupa & Company	1,694.68	7.95	859.50	27.4	14.4	0.9	213.10
Lovable Lingerie	579.52	16.80	157.40	24.5	16.7	0.6	344.95
Ashapura Intimate	246.16	19.47	143.86	34.9	10.8	0.4	126.45
Maxwell Industries	89.88	12.62	253.00	15.7	8.1	1.8	14.25
Women’s Next	16.25	2.50	32.23	23.9	5.7	0.0	65.00

 

Manager’s Track

WNL’s IPO is managed by a relatively unknown merchant banker, Pantomath Capital Advisors. The investment banker has so far handled just one IPO, Si Vi Shipping (SVS) which hit the market last month. SVS, offered at Rs 25, is currently quoting around Rs 35. Interestingly, the little known lead manager has underwritten the entire issue amount of both the IPOs.