SRS - Fuzzy logic
8/15/2011 2:51 PM Monday
SRS Ltd., a Delhi-based company, is going public on August 23, with an IPO of 3.5 crore shares. At the time of writing this analysis, the company had not announced its price band, and hence the issue size is not available. But going from the objects of the issue, we get the feeling that the company is looking at raising about Rs 210-220 crore through this IPO. This gives a rough idea about the price band, which could be in the region of Rs 60-65 per share.
Is this a good price for investors to invest in this IPO? Our opinion on this follows in the later part of our analysis. But first, let us understand a few basics about the company.
SRS, incorporated in August 2000 as SRS Commercials, went on a name-changing spree to ride the investors’ fancy. First, it changed its name to ‘SRS Entertainment’ in January 2005. In December 2008, it again changed its name to ‘SRS Entertainment & Multitrade’. A month hence, it realised that the name wasn’t proper, and changed it to ‘SRS Entertainment and Retail’. The present name was assumed in July 2009.
This frequent name changing gives a good idea about the management’s thought process. We believe that the management seems to be confused about the business that they really wanted to be in. The promoters have another company listed on the bourses, called SRS Real Infra (the original name was Manu Finlease), with a total of 968 shareholders, including the promoters. This also tells us about the promoters’ background.
From its history of name changes, not even in your wildest imagination would it occur to you that SRS is more of a gold jewellery manufacturing company. As on March 2011, 72 per cent of the company’s turnover comes from the jewellery business, while cash and carry (retail) brings in 26 per cent. The rest comes from its multiplex and food courts business. In terms of profits, the jewellery business accounts for close to 90 per cent of its Profit Before Interest and Tax (PBIT).
Now, SKS is tapping the market to fund its expansion plans. The company wants to set up 15 new cinemas with 51 screens (it currently has 30 screens) at a cost of Rs 101.18 crore, 29 new retail stores (existing 23, with floor space of 1.32 lakh square feet) with a capex of Rs 53.69 crore and 33 food courts (existing 11 food courts, three fine dining restaurants) at a cost of Rs 40 crore. In addition, its jewellery business would need capex of Rs 16 crore.
On the financial front, the performance of the company is fairly average. Of the reported sales of Rs 2041 crore for the year ended March 2011, traded sales accounted for Rs 1060 crore. Note, that the stock market does not give a higher P/E to trading companies. Also, during the last three years, the company has been reporting negative cash flow from operations. This means that it would need more working capital. With the surging cost of borrowing, the financials of the company may be impacted adversely. For the year ended March 2011, the company reported PBIT of Rs 81.49 crore, and its interest cost for this period was Rs 24.52 crore. Higher interest costs can impact the company’s profit margins in the cur-rent year.
On the valuation front, the company is more of a jewellery company, and its valuations would be more in line with other jewellery businesses. A much larger player like Shree Ganesh Jewellers is commanding a P/E of just four times. In fact, most of the players in the industry command a very low P/E, in the region of 8-9 times, as there is no investor fancy for this sector.
We believe that for SRS, the best possible P/E should be 8-9 times, and based on its net profit for FY11, the market cap comes to about Rs 342 crore. The company’s post issue shares would be 13.92 crore, giving it a valuation of Rs 25 per share. As mentioned earlier, the company intends to ask for Rs 60-65, making the issue highly overpriced. Nonetheless, we will update our readers through our website www.dsij.in as and when the company announces its price band.
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