Timbor Home is entering the capital market on 30^th May 2011 with a public issue of 36.9 lakh equity shares of Rs.10 each, in the price band of Rs. 54 to Rs. 63 per share, aiming to raise Rs. 20-23 crore. This small IPO, comprising of 25% of the company's post issue paid-up capital, closes on 2^nd June 2011.

Ahmedabad based manufacturer and retailer of modular kitchens, home furniture, doors and dried lumber, Timbor Home has 3 manufacturing facilities in Ahmedabad and Anand in Gujarat. It has 84 retail outlets pan-India, of which, only 4 are company owned and 2 are shop-in-shops with Reliance Retail. All other stores, comprising the vast majority, are operated on franchise basis. Although the franchise stores account for 93% of the store count, they contributed only 47% to company sales in FY10. Also, about 50% of the company's outlets are concentrated in Western India alone, given 40 outlets located in states of Gujarat, Maharashtra, Rajasthan and Madhya Pradesh.

The company, originally incorporated as Inside Outside India Dot Com Private Limited in May 2000, has been witnessing negative cash flows from operations for the last 5 years, since the time it has presented financial statements in the RHP. For FY10, its sales stood at Rs. 51 crore while profit after tax (PAT) was mere Rs. 1.8 crore, indicating net margins of 3.5%. During 9mFY11, sales were Rs. 55 crore and profit before tax (PBT) Rs. 3.1 crore. The company has not made a provision for taxes for 9mFY11 indicating misleading financials in its offer document as it has stated the same amount for both PBT and PAT of Rs. 3.1 crore, confusing investors. On applying the maximum tax rate i.e the bracket under which the company falls in, PAT for 9mFY11 works out to about Rs. 2 crore, leading to 3.6% net margin and nine monthly EPS of less than Rs. 2.

As on 31-12-10, company's equity stands at Rs. 11.07 crore while its networth is Rs. 22 crore. Current debt outstanding is Rs. 31 crore leading to a high debt-equity ratio of 1.4:1. Being working capital intensive, a large part of funds are blocked in sundry debtors, which stood at Rs. 37.2 crore as at 31-12-10, amounting to over 6 months of sales. This shows very poor collection pattern, as debtor days have risen to over 6 months as of 31-12-10 from less than 3 months, two years ago. The company hopes to reduce outstanding debtors to 4 months of sales in FY12, but this looks highly challenging, if not impossible, given the stiff competitive industry, it operates in.  Moreover, the sharp spurt in debtors from Rs.18.7 crore (on 31-03-10) to Rs. 37.2 crore (on 31-12-10) raises suspicion for fictitious sales, only to present healthy topline at the time of public issue.  No wonder then that CRISIL has graded the issue 1 on 5, indicating poor fundamentals.

From funds raised via the IPO, a major portion (Rs. 13 crore accounting for about 60% of issue size) will meet just the working capital requirements. About Rs. 2.6 crore will be capex for machinery, while Rs. 4 crore will go towards establishing 20 company-owned large format stores in the next 2 years. Thus, only one-third of funds raised through the IPO will build manufacturing and distribution reach, rest will be all maintenance spending.

Current promoter holding stands at 63.26%, which will reduce to about 47% post-issue. This will further decrease on expiry of the lock-in period, as the promoters are required to compensate Brand Equity Treaties (holding 3.09% of pre-issue shareholding) who were issued shares at Rs. 98 a piece (bonus adjusted price of Rs. 78.40) in April 2010, on account of lower issue price in the current IPO. Currently, Bennett Colman & Co. holds 26.5% while Dainik Bhaskar's Writer and Publishers (both equity-for-ad transactions) holds 2.51% stake in the company.    

At upper band of Rs. 63 per share, company is expecting a market cap of Rs. 93 crore on listing and an enterprise value of Rs. 123 crore, which is very aggressive by all means and parameters, giving that the company is relatively a new entrant in the highly competitive ready-made furniture space and operates on thin margins. PE multiple of 26 times based on expected FY11 EPS of around Rs. 2.5 per share is beyond any fundamental justification!

Simply avoid the issue.