SRS Ltd

SRS Limited is entering the capital market on 23^rd August 2011 with a public issue of 3.5 crore equity shares of Rs.10 each, priced between Rs. 58-65 per share, aiming to mop Rs. 203-227.50 crore from public. The issue, constituting 25.13% of post issue paid-up capital of the company, closes on August 26.

The company is engaged in the following businesses:

1. Cinema exhibition – operates 30 screens comprising 7,608 seats at 11 properties in 6 North Indian cities under SRS Cinemas
2. Retail – 23 retail stores under brands SRS Value Bazaar and SRS Fashion Wear in North India
3. Food and beverages – comprises 11 food courts under SRS 7dayz brand in North and Central India, 3 fine dining restaurants under Punjabi Haandi brand at Faridabad, Gorakhpur and Ludhiana. Also conducts catering services under SRS Banquets at Faridabad
4. Jewellery – Manufacturing of jewellery at 2 facilities in Delhi and Noida and wholesale / retailing through 3 stores.

Of the funds raised via IPO, company proposes to establish:

1. 15 new cinemas with 51 screens by deploying Rs. 101 crore
2. 29 new retail stores by deploying Rs. 54 crore
3. 33 new food courts / restaurants by deploying Rs. 40 crore
4. A jewellery manufacturing unit and 17 jewellery retail stores by deploying Rs. 17 crore

It may avail term loan of Rs. 20 crore to meet additional fund needs.

Few facts are very alarming, which instantly raise the SOS signal with respect to the company-

• Certain promoters and promoter group companies were prohibited by SEBI from accessing capital markets in the past on grounds of alleged malpractices in a public issue in 1995.  Also SEBI had withdrawn acknowledgement card in case of proposed public issue of a group company in 1996 for irregularities in disclosures in offer document.

• There have been multiple purchase and sale transactions of equity shares between 35 promoter group companies during early-2010 at varying rates on the very same day in case of the same company. E.g. SRS Commercial Company Ltd. purchased shares on 31^st March 2010 at different rates, ranging from as low as Rs. 20 to as high as Rs. 100 per share in cash. Such transactions raise suspicion and are not at all comforting as to the intent of promoters and group companies.

• 8 group companies have objects which are in conflict with the businesses of the company (6 of these company are only shell companies not undertaking any business currently), for which non-compete agreements were entered into in October 2010. However, in May 2011 via, Addendum to the Non-Compete Agreements, company has agreed to pay non-compete fees of Rs. 1 lakh per annum to each of these 8 companies. It is quite strange for the company to be paying such fees (instead of collecting them, in case of violation) and only creates unnecessary drain on its financials.

• Rs. 1.5 crore has been paid by the company as part-consideration for acquisition of commercial premises in Delhi, for which sale deed is not executed nor is the property registered in company’s name.

For FY11, company reported consolidated sales of Rs. 2,043 crore and net profit of Rs. 38 crore, leading to thin margin of 1.8% and EPS of Rs. 3.60 on equity of Rs. 104 crore. Besides the high equity, company’s balance sheet is levered with debt exposure of Rs. 274 crore, as of 31^st March 2011, with net worth amounting to Rs. 313 crore. Post-IPO, promoter holding will decline to 74.04% from current 98.89%

At upper price band of Rs. 65, company is issuing shares at PE multiple of 18x based on historic numbers, as against ongoing single-digit multiples of peers trading in the secondary markets. Given the fragile market sentiments, where even frontline stocks are languishing low, this IPO does not make good investment sense.

The issue is a clear avoid.