M and B Switchgears has entered the capital market on 28^th September 2011 with a fresh issue of 50 lakh equity shares of Rs.10 each, in the price band of Rs. 180-186 per share, aiming to raise Rs. 90-93 crore. The issue, constituting 25% of the company's post issue paid-up capital, closes on 5^th October.  

D & A Financial Services is the book running lead manager (BRLM) to the issue, which has previously handled poor issues such as Shilpi Cable (in April 2011) and very recently, in September 2011, Brooks Laboratories. Both these issues are currently in a very dismal state, ruling 75-80% below their respective issue prices.  

M and B Switchgears manufactures distribution transformers, power transformers, furnace transformers and special purpose transformers, with annual installed capacity of 5,109 transformers at Indore. This also translates into capacity of 9 lakh KVA per annum.

For FY11, company reported net sales of only Rs. 34 crore, down from Rs. 38 crore in FY10. Profit after tax also declined over the last one year to Rs. 77 lakh from Rs. 92 lakh, in the previous year. Thus, both sales and profitability have shown de-growth on a year-on-year basis. Company operates on very paltry net margins of 2-2.5%. Its EPS for FY11 stood at Rs. 0.67 on very high equity base of Rs. 15 crore, as of 31^st March 2011, post-bonus issue. Promoter holding will to drop from 94.26% currently to 70.69%, post IPO.

The company is now diversifying into solar power projects, for which it is currently establishing 2 MWp of grid connected PV solar power project in the Rajgarh district of Madhya Pradesh, being funded via internal accruals and term loan from banks. As of 30^th August 2011, it has taken unsecured debt of Rs.45 crore, to fund the same.   

Through the IPO proceeds, it plans to establish a new grid connected 4 MWp solar photovoltaic power plant in Rajghar district of Madhya Pradesh with investment of Rs. 71 crore. This project will have capacity to generate 6.66 million units of power at 19% plant load factor (PLF).  

This diversification move seems very illogical and unnecessary, as the company and promoters, both lack any experience in operating solar power projects while significant investment of over Rs. 100 crore is being envisaged in this new business vertical. Servicing the high debt and the expanded equity base will be very difficult for the company in the company years, only denting the profitability further. Moreover, history is proof of the dismal fate of many solar power companies earlier, such as Moser Baer Solar, Indosolar, Websol Energy, XL Telecom - all have disappointed investors, to say the least!

Company is seeking a market cap of Rs. 372 crore, on listing, at price of Rs. 186 per share, against net worth of Rs. 16 crore, as of 31^st March 2011. At the lower and upper end of price band of Rs. 180 to 186, shares are being offered at PE multiple of 269 and 278 times! Don't rub your eyes - yes it is a 3 digit PE multiple. We need not analyse the issue any further. Its a no brainer that the issue is priced aggressively, beyond anyone's imagination and what nobody has previously dared to do!

Justifying par value of Rs. 10 per share is also very difficult for this tiny company, let alone any premium.

On exorbitant valuations, simply stay clear of this IPO!