Structuring a company apparently for an IPO, unstable topline, pre-issue financial bloom, wafer-thin margins, negative cash-flows, board of family and friends, 120 sq. ft rented showroom-cum-registered office-cum-corporate office, etc. etc. speak enough what’s in store!
|
OFFER AT A GLANCE |
|
|
Name |
RO Jewels Ltd |
|
Offer Amount |
Rs 4.91cr |
|
Offer Quantity |
13.65 lakh shares of Rs 10 each |
|
Offer on Total Equity |
48.2% |
|
Post-issue Promoter stake |
45.3% |
|
Post-IPO Capital |
Rs 2.83 cr |
|
Offer Price |
Rs 36 |
|
Minimum Application Qty |
3000 |
|
Offer Opens |
March 12, 2020 |
|
Offer Closes |
March 17, 2020 |
|
Basis Allotment |
March 20, 2020 |
|
Refund |
March 23, 2020 |
|
Demat Credit |
March 24, 2020 |
|
Trading |
March 25, 2020 |
|
Listing |
SME Platform of BSE |
|
Rating |
Nil |
|
Lead Manager |
First Overseas Capital |
|
Market Maker |
Beeline Broking |
|
Underwriter |
First Overseas Capital (100%) |
|
Registrar |
Kfin Technologies |
The Offer
The present offer is an initial public issue of 13,65,000 equity shares of face value of Rs 10 at a price of Rs 36 a piece aggregating to Rs 491.40 lakh. Of this, 69,000 shares (Rs 24.84 lakh) are reserved for the Market Maker. The offer constitutes 48.2% of the company’s post-IPO paid up equity share capital of Rs 2.83 cr. As 12.62% (Rs 18.52 lakh) of the existing equity of Rs 146.71 lakh is classified as public holding, the promoters’ stake in the enlarged capital would be only 45.26%.
This fixed price offer is proposed to be listed on the SME platform of BSE. Investors should apply for a minimum quantity of 3000 shares (Rs 1,08,000). The issue manager, First Overseas Capital, has underwritten the entire issue amount. Ahmedabad-based Beeline Broking is acting as Market Maker to the issue.
Issue Object
Of the IPO proceeds, Rs 25 lakh is budgeted for issue related expenses. As much as Rs 460 lakh is earmarked for additional working capital and the balance Rs 6.4 lakh is kept for general corporate purpose.
Business & Background
The SME platform has attracted many a proprietary businessman to convert his firm into a limited company and tap the capital market. One such case is RO Jewels Ltd (ROJL). This Ahmedabad-based company, though asking for a premium of Rs 26 per share, was registered only in December 2018. ROJL reportedly acquired the entire business of a proprietorship concern of the promoters, namely Ravi Ornaments (RO), through a Business Succession Agreement dated December 18, 2019 which is effective from May 31, 2019. Interestingly, the proprietor and ROJL had exchanged letters dated the same day of ROJL’s incorporation (December 11, 2018)!
The promoters, namely Bharat Shah (53), Pravinaben Shah (47) and Shubham (24), together claim to have 40 years of experience in gems and jewellery industry. ROJL is engaged in the wholesale business of gold and silver chains. The company mainly sells gold-based chains, bracelets, gold/silver bars and necklaces. It buys readymade Chains and other jewellery from the jewel manufacturers or independent wholesalers located in Ahmedabad and Mumbai. These are then sold through the company’s showroom situated at Manek Chowk, Ahmedabad and by its marketing and sales team directly to other jewellery stores. The company reportedly sells its products under the brand name Ravi Ornaments.
Financial Performance
Being a new company, ROJL has a limited track record to boast about. For the fiscal 2019 the company posted a top line of Rs 424 lakh and netted a profit of just Rs 1.49 lakh. For the first half of the current fiscal, after annexing the business of the promoters’ proprietary concern, the company has reported a sale of Rs 10.47 cr on which it netted a profit of Rs 15 lakh. On an annualized basis, this may yield an EPS of Rs 1.06 for the current year.
|
(Rs in Lakh) |
Sep-19 |
Mar-19 |
Mar-18 |
Mar-17 |
|
Months |
6 |
12 |
12 |
12 |
|
Revenue |
1047.22 |
424.34 |
975.68 |
573.56 |
|
Other Income |
0 |
0 |
0.02 |
0.84 |
|
EBITDA |
22.33 |
2.38 |
22.4 |
18.4 |
|
OPM% |
2.1 |
0.6 |
2.3 |
3.1 |
|
Interest |
0.01 |
0 |
13.93 |
10.79 |
|
Depreciation |
0.82 |
0.89 |
1.41 |
1.58 |
|
Pre-tax Profit |
21.5 |
1.49 |
7.06 |
6.03 |
|
Net Profit |
15.05 |
1.49 |
6.85 |
5.87 |
|
Equity |
146.71 |
44.84 |
14.34 |
17.45 |
|
Reserves |
369.84 |
133 |
7.06 |
6.03 |
|
EPS Rs |
1.03 |
0.33 |
4.78 |
3.36 |
Valuation
The less than two-year-old ROJL is asking for a share premium of Rs 3.5 cr through the IPO. How does it justify? At the end of fiscal 2019 its earned a surplus amounting to just Rs 1.5 lakh! At the end of September 2019, this increased to Rs 16.5 lakh. Without adequate earnings to justify any share premium, the company converted loans/advances/stocks into shares at an aggregate share premium of over Rs 3.5 cr which has made easy for the company to ask for an equal amount as share premium from the public.
How does ROJL compare with its peers? For the issue manager First Overseas, ROJL will be the seventh IPO from the jewellery industry since 2016. Almost all the earlier jewellery IPOs managed by the issue manager had miniscule profits to report which resulted in absurd P/E multiples.
Of all the jewellery IPOs managed by First Overseas, ROJL has the least percentage of promoters’ stake (45.3%). ROJL’s pre-IPO half-yearly performance may look impressive but if the post-IPO performance of First Overseas’ previous jewellery IPO, S M Gold, is anything to go by, one cannot take the pre-issue blooming performance of ROJL seriously. Incidentally, like ROJL, S M Gold too was floated to take over the proprietary business of its promoters!
S M Gold prospectus claimed a net profit of Rs 21.55 lakh for the first quarter ending June 2018. But, for the full year it netted a profit of just Rs 2 lakh! It is high time SEBI asks the issue managers to reveal the `Promise vs Performance’ of their earlier IPOs in addition to the price behaviour.
|
(Amt in lakh) |
Darshan |
Kenvi |
Gautam |
Palm |
S M |
UH |
RO |
|
Sales |
1282.03 |
3085.17 |
4372.82 |
4191.39 |
2631.81 |
882.48 |
2094.44 |
|
OPM % |
3.5 |
0.6 |
0.7 |
0.3 |
0 |
0.8 |
2.1 |
|
Pre-tax Profit |
63.45 |
11.78 |
24.80 |
11.57 |
2.82 |
3.84 |
43.00 |
|
Net Profit |
41.88 |
7.06 |
17.73 |
8.84 |
2.09 |
2.84 |
30.1 |
|
Equity |
1000.59 |
987.53 |
549.11 |
738.31 |
669.17 |
611.64 |
283.21 |
|
Promo Stake% |
48.8 |
65.1 |
61.7 |
57.5 |
62.6 |
63.8 |
45.3 |
|
EPS (Rs) |
0.42 |
0.07 |
0.32 |
0.12 |
0.03 |
0.05 |
1.06 |
|
DIV (%) |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
|
P/E |
88.1 |
173.0 |
353.1 |
165.8 |
1175.0 |
230.0 |
33.9 |
|
Cur. Price |
37 |
12.11 |
113 |
19.9 |
35.25 |
11.5 |
36 |
(Note: RO Jewel figures are annualized from the 6-months ending September 2019 financials. Other companies’ figures are for the year ended March 2019)
Perception & Concern
ROJL’s credentials are far from convincing. The company uses just a 120 sq. ft. room as its Registered Office-cum-Corporate Office-cum-Showroom. What’s more, the property has been leased from one of the promoters! The company’s board consists of husband and wife, their 24-year-old son and two of his friends who are also of the same age.
While the public company ROJL itself is struggling to post convincing bottom line the promoters want to run three more entities in the business similar to the public company. Last three years of operations have resulted in negative cash flow.
The company already has a few public shareholders (Abhishek Finlease Ltd – 62,708 shares, Vivid Mercantile Ltd – 61,250 shares, Mukeshkumar Sevantilal Surani – 43,750 shares) who may turn as sellers as their cost of holding is less than the IPO price.
Market Maker Track
SEBI Rules may say that a market maker should ensure a two-way quote at least 75% of the trading days. But, how many of the market makers follow the rule? ROJL’s market maker, Beeline Broking has undertaken the job of market making in 31 SME IPOs. Of these, just two IPOs have been traded more than 75% of the days since listing. SEBI should clarify why such `failed market makers’ are still allowed to act as a market maker without any checks and balances.
How effective was Beeline Broking’s Market-making?
|
ISSUER NAME |
IPO DATE |
DAYS |
DAYS |
Liquid % |
|
Shree Kris Infr |
15-Nov-18 |
313 |
22 |
7 |
|
Gautam Gem |
24-Jan-18 |
513 |
117 |
22.8 |
|
Siddharth Edu |
29-Sep-17 |
594 |
144 |
24.2 |
|
Ridings Consult |
14-Mar-18 |
482 |
126 |
26.1 |
|
Palm Jewel |
25-May-18 |
429 |
114 |
26.6 |
|
Shubham Polys |
28-Sep-18 |
346 |
96 |
27.7 |
|
Ranjeet Mechat |
12-Sep-18 |
357 |
104 |
29.1 |
|
Riddhi Corp |
12-Jun-17 |
670 |
206 |
30.7 |
|
Megastar Food |
14-May-18 |
442 |
142 |
32.1 |
|
Solex Energy |
23-Jan-18 |
515 |
168 |
32.6 |
|
Milton Ind |
29-Sep-17 |
592 |
197 |
33.3 |
|
Sikko Indus |
5-Apr-17 |
716 |
246 |
34.4 |
|
Shish Ind |
23-Aug-17 |
620 |
215 |
34.7 |
|
Sharika Enter |
15-Nov-17 |
563 |
226 |
40.1 |
|
Synergy Green |
4-Sep-18 |
360 |
151 |
41.9 |
|
Narmada Agro |
28-Mar-18 |
466 |
197 |
42.3 |
|
Axita Cotton |
27-Dec-18 |
286 |
124 |
43.4 |
|
Novateor |
30-Aug-19 |
121 |
54 |
44.6 |
|
CRP Risk Mgmt |
18-Jan-18 |
518 |
272 |
52.5 |
|
Zodiac Energy |
23-Nov-17 |
557 |
311 |
55.8 |
|
Inflame Appli |
6-Mar-18 |
488 |
288 |
59 |
|
Ratnabhumi Dev |
4-Dec-17 |
550 |
329 |
59.8 |
|
Transwind Infra |
30-Jun-17 |
657 |
403 |
61.3 |
|
Touchwood Ent |
11-Dec-17 |
545 |
344 |
63.1 |
|
Indo US Bio |
30-Apr-18 |
451 |
286 |
63.4 |
|
Bright Solar |
26-Jun-18 |
410 |
261 |
63.7 |
|
Reliable Data |
27-Sep-17 |
595 |
396 |
66.6 |
|
Innovana Think |
29-Nov-17 |
552 |
389 |
70.5 |
|
Silver Touch |
20-Nov-17 |
559 |
416 |
74.4 |
|
ICL Organic |
31-Jan-20 |
14 |
12 |
85.7 |
|
Airan |
14-Mar-17 |
731 |
689 |
94.3 |
Lead Manager Track
As regards market performance of the IPOs managed by ROJL’s issue manager, the CIFCO clan-controlled First Overseas Capital has managed 22 IPOs in last five years of which, a half is quoting below the offer value. Another discouraging factor is that none of the IPO managed by First Overseas has ensured the 75% liquidity in last five years.
|
ISSUER NAME |
IPO DATE |
IPO VAL |
CUR VAL |
GAIN |
GAIN % |
DAYS |
DAYS |
LIQUID % |
|
HKG |
3/25/2015 |
1.50 |
7.93 |
6.43 |
428.7 |
1213 |
375 |
30.9 |
|
Athena Const |
3/25/2015 |
2.50 |
3.40 |
0.90 |
36.0 |
1212 |
534 |
44.1 |
|
Funny Soft |
5/14/2015 |
4.59 |
0.12 |
-4.47 |
-97.3 |
1180 |
434 |
36.8 |
|
Mishka |
6/26/2015 |
5.45 |
17.47 |
12.02 |
220.5 |
1151 |
466 |
40.5 |
|
Think Ink |
8/13/2015 |
15.90 |
30.57 |
14.67 |
92.3 |
1114 |
532 |
47.8 |
|
Tejnaksh Hea |
9/30/2015 |
2.43 |
12.31 |
9.87 |
406.0 |
1079 |
648 |
60.1 |
|
Navigant Corp |
11/30/2015 |
1.19 |
1.19 |
0.00 |
0.0 |
1043 |
79 |
7.6 |
|
Ganga Pharma |
1/29/2016 |
1.54 |
0.72 |
-0.81 |
-53.0 |
999 |
106 |
10.6 |
|
CHD Chem |
3/21/2016 |
1.98 |
7.92 |
5.94 |
300.0 |
973 |
247 |
25.4 |
|
Ghushine Fint |
4/25/2016 |
2.60 |
1.83 |
-0.77 |
-29.5 |
952 |
86 |
9.0 |
|
Darshan Orna |
5/2/2016 |
7.54 |
9.76 |
2.22 |
29.5 |
942 |
513 |
54.5 |
|
Spicy Ent |
9/1/2016 |
4.82 |
2.36 |
-2.46 |
-51.1 |
861 |
289 |
33.6 |
|
Nouritrans Ex |
9/4/2017 |
6.12 |
0.21 |
-5.91 |
-96.6 |
612 |
318 |
52.0 |
|
Kaarya Facil |
10/12/2017 |
6.40 |
1.69 |
-4.70 |
-73.5 |
584 |
187 |
32.0 |
|
Gautam Gem |
1/24/2018 |
7.56 |
23.73 |
16.17 |
213.9 |
513 |
117 |
22.8 |
|
Kenvi Jewel |
2/2/2018 |
6.70 |
4.73 |
-1.97 |
-29.4 |
507 |
87 |
17.2 |
|
UH Zaveri |
5/8/2018 |
7.99 |
2.55 |
-5.44 |
-68.1 |
444 |
124 |
27.9 |
|
Palm Jewel |
5/25/2018 |
8.90 |
5.91 |
-3.00 |
-33.7 |
429 |
114 |
26.6 |
|
S M Gold |
10/3/2018 |
7.50 |
8.81 |
1.31 |
17.5 |
342 |
77 |
22.5 |
|
Vivid Mercant |
9/28/2018 |
10.74 |
2.91 |
-7.83 |
-72.9 |
340 |
83 |
24.4 |
|
Novateor |
8/30/2019 |
4.49 |
1.65 |
-2.84 |
-63.2 |
121 |
54 |
44.6 |
|
Janus Corp |
1/27/2020 |
8.00 |
8.63 |
0.64 |
8.0 |
21 |
15 |
71.4 |
|
|
|
126.44 |
156.40 |
29.97 |
23.7 |
16632 |
5485 |
33.0 |