Birla Pacific Medspa is entering the capital market on 20^th June 2011 to raise Rs. 65.18 crore via a public issue of 5.9-6.5 crore equity shares of Rs.10 each, in the price band of Rs. 10 to Rs. 11 per share. The issue, comprising a heavy dilution of about 56-58% of the company’s post issue paid-up capital, closes on 23^rd June 2011.

Birla Pacific Medspa was established as a joint venture between Yash Birla Group and Singapore’s Pacific Healthcare for operating healthcare centres and medical spas under the Evolve brand in India. Although Pacific Healthcare is no longer a JV partner, it remains just a shareholder with 12.42% stake. The company currently has 7 outlets in Mumbai and Chennai, two of which are on franchise basis.

The company proposes to establish 55 outlets of Evolve Medspa in various cities with Rs 49.5 crore raised via the public issue. It plans to establish these 55 outlets at investment of Rs. 90 lakh per outlet over the next 3 years. Another Rs 6 crore is proposed to be used for brand promotion while an equal amount will go towards meeting issue expenses.

With a very short operating history as the company was incorporated in July 2008, the company’s financials pose a very poor picture. For nine months ended 31^st December 2010, company clocked sales of just Rs. 1.7 crore and incurred net loss of Rs. 3.7 crore, mainly due to heavy admin expenses of Rs. 3.8 crore. Sales for six months ended stood at Rs. 1.5 crore incurring net loss of Rs. 3.3 crore. EPS for 9MFY11 was negative Rs. 1.11 on a very high equity base of Rs.46.96 crore.

Post IPO, equity will expand to Rs. 112.1 crore which is uncomfortably high for the scale and nature of business operations. Serving such high equity in future can pose potential challenges. Promoter holding, currently at 64.77%, will reduce to just approx. 28% post IPO, given the very heavy dilution. About 22.81% of present equity is held by BCCL in an ad-for equity treaty, making it the second largest shareholder after the Yash Birla group.

Company’s networth is Rs. 37.5 crore and BVPS of Rs. 8.38, against the face value of Rs. 10, due to cumulative losses of over Rs. 11.5 crore, incurred since inception. Infact, there is a serious error in reporting the book value per share on page xxiv of the RHP as Rs. 11.34, against the correct Rs. 8.38 stated on page 30 of the same document, which is highly mis-leading. Even at a par value of Rs. 10 per share, company is seeking very aggressive pre-money valuation of Rs. 47 crore or Rs. 6.7 crore per outlet, which generate annual sales of less than Rs. 40 lakh and are established at an investment of Rs. 90 lakh a couple of years ago.

Yash Birla Group is not perceived as a very dynamic corporate entity, lacking any commendable track record. IPO grading of 2 on 5 indicates below average fundamentals. Arihant Capital Market is the BRLM, well-known for bringing many weak companies to the primary markets at irrational valuations. Moreover, the company is seeking listing only on BSE and not on NSE, the latter having more stringent listing norms.

Don’t get lured by the price tag. The loss making company, projecting slow growth with heavy equity dilution via the IPO is not worth your investment given the utterly fragile secondary market conditions.

Fundamentally, issue is a clear avoid.