Bharatiya Global Infomedia has entered the capital market on 11^th July 2011 with a public issue of 67.2 lakh equity shares of Rs.10 each, in the price band of Rs. 75 to Rs. 82 per share, to raise Rs. 50-55 crore. The issue, comprising a dilution of 42.42%, closes on 14^th July.

We have been repeatedly warning our readers and the investor community at large, against highly-manipulated IPOs being undertaken by promoters in nexus with several intermediaries to trap gullible retail investors. This is yet another issue from the same family of 'fundamentally unsound' IPOs with a sole motive to trap retail investors. Stay clear of it!

Bharatiya Global is a technology company offering IT based solutions such as RFID and smart card and also operates a digital post production studio for the media and entertainment industry in Mumbai. Over 95% of the company's revenues are generated from the IT business while the media and entertainment division is very small. Company's top 10 customers accounted for almost half of its business in FY11, making it highly dependent on few clients for business and growth.

The company's name along with 3 promoter group companies appears on Indian's Govt.'s website www.watchoutinvestors.com for rejection of an NBFC application certificate as on July 31, 2004. This fact should raise a bright red signal in the minds of prospective investors, refraining one from investing in the company.

Besides this, there are several other compliance issues such as qualified audit report for the last 4 years since FY07, every year upto FY11, including some serious offences like investments not being held in the name of the company, irregular re-payment of loan taken, delay in payment of statutory dues etc. Also, the company has not obtained deposit confirmation (a very standard practice) from all debtors, creditors and for loans and advances, which does not confirm as to how good are these balances appearing the company's balance sheet.

The company is undertaking IPO to fund the following objects -

1. Upgrade post production studio with investment of Rs 13.7 crore and capex in IT division of Rs 8.4 crore
2. Expand R&D technology centre for Rs. 6.6 crore
3. Purchase office space in Mumbai for Rs 6 crore and part-finance acquisition of corporate office in Noida to the extent of Rs 4 crore
4. Repay existing bank borrowings worth Rs 2.7 crore
5. Working capital requirements of Rs 5 crore

Working capital for FY12 is projected at Rs 16.55 crore, of which, only Rs. 5.05 crore will be met via IPO proceeds. Balance Rs. 11.5 crore will be via bank borrowings, which has not yet been tied-up.

Although company expects to complete the expansion by November 2011, critical machinery for the same is yet to be ordered. Besides, expansion has already been delayed earlier due to delay in raising funds via the IPO.

In FY11, company posted revenue of Rs. 71 crore and earned PAT of Rs. 4.5 crore, indicating EPS of Rs. 4.99 in equity of Rs. 9.12 crore. This amounts to PE multiple of 16.4 times, based on the upper end of price band of 82. When established mid-size IT companies rule at a PE multiples of around 5 times, there is no justification to allot a mid-teen PE multiple to this small-sized company, with geographic presence restricted to Delhi and Mumbai regions.  

Besides, the 53% YoY topline growth in FY11, from Rs. 46 crore in FY10, seems more as a 'financial preparation' for the upcoming IPO, since such growth was not reported by the company even in the earlier years on a lower base. Infact, revenue and profits have been abnormally low in FY08 and have shown fluctuation trends historically.

As of 31^st March 2011, company's networth stood at Rs. 32 crore, with BVPS of Rs. 35 and debt of Rs. 6 crore. What is alarming are debtor days of over 5 months, which put severe strain on the working capital. Moreover, since company does not obtain balance confirmation, how good these assets? Post-issue, promoter stake will be about 51.06%, down from current 88.66%.

Post-listing, a market cap of Rs. 130 crore (at upper end of 82) seems irrational for an IT company with annual sales of Rs. 71 crore. Price to sales multiple of 1.8x and PE of over 16x is simply unjustified for this issue with poor fundamentals.

Avoid the IPO!