Vaswani Industries is entering the capital market on 29^th April 2011 with a public issue of 1 crore equity shares of Rs.10 each, priced between Rs. 45-49 per share. The issue, constituting 42.57% of post issue paid-up capital of the company, closes on 3^rd May.

We'll draw attention to the issue opening date - Since SEBI guidelines require updating IPO prospectus with audited statements, not more than 6 months old from issue opening date, the company is presenting financials upto 31^st October 2010 and opening the issue on 29^th April 2011, the last working day of April. Had the issue not open on 29^th April, company would be required to file audited financial statements again with the regulator, delaying IPO process further and missing the bus to cash-in on the current positive sentiment in IPO market.  

We have been repeatedly warning our viewers and the investor community at large, against highly-manipulated IPOs being undertaken by promoters in nexus with several intermediaries to trap gullible retail investors. Vaswani Industries is another such issue (also being managed by Ashika Capital known to be active in such acts) and there is nothing compelling in the company, which calls one to park their money in it, even for momentum gains, if any.

Chattisgarh-based Vaswani Industries is a small-scale manufacturer of coal-based sponge iron with installed capacity of 90,000 MTPA of sponge iron and 36,000 MTPA steel billets, supported by 11.5 MW captive power plant. However, its capacity utilization has been very low and stood at barely 53% and 12% for sponge iron and billets respectively in FY10. Sponge iron capacity utilization dropped to barely 34% in 7mFY11 raising concern on the company's business and operations.  

For FY10, company reported sales of Rs. 92 crore, of which, one-fourth came from sale of power. Top 5 customers accounted for 35% of sales, while top 10 customers accounted for 46%, indicating concentration of clients. EBIT for the year stood at Rs. 11.1 crore, of which, Rs. 5.9 crore was contributed by the power segment alone. Hence, company's main business of iron and steel accounted for less than half of operating profits of just Rs. 4.2 crore. PAT for FY10 was barely Rs. 3.7 crore, eaten up grossly by huge interest burden of over Rs. 5 crore, leading to net margin of just 4% and EPS of Rs. 3.15 on equity of Rs. 13.49 crore.

For seven months ended 31-Oct-2010, sales were Rs. 69 crore, maintaining the 3:1 mix of iron/steel and power. However, EBIT, which stood at Rs. 7.3 crore for 7MFY11, saw significantly higher contribution of almost 80% from the power segment, which puts a big question mark on the working and prospects of the company's primary business of iron and steel. PAT for 7mFY11 was Rs. 2.7 crore, leading to EPS of Rs. 2 for the period. Thus, the company's EPS has remained around the Rs. 3-3.5 range for the past 4 years, indicating sluggishness on the earnings front. Interest expense at Rs. 3.2 crore was higher than the company's net profit during 7mFY11, indicating weak financials and balance sheet position.  

As on 31-Oct-2010, company's networth stood at Rs. 42 crore which will more than double to Rs.91 crore post-IPO. Promoter holding will decline to 57.43% post-issue, from 100%, due to the heavy dilution of 42.57%, again a negative.  It's outstanding debt was as high as Rs. 71 crore, leading to debt equity ratio of 1.67 which will cool to 0.5:1 post IPO, as company will pre-pay term loan of Rs. 25 crore from the IPO proceeds. Since the business is very working capital intensive, Rs. 19 crore from funds raised will go towards net current assets

Debtors as of 31-Oct-2010 stood at Rs. 11.6 crore, of which, Rs. 1.3 crore is outstanding for over six months and have not been provided for. Also, loans and advances of Rs. 19 crore is exceptionally high which includes Rs. 1 crore to a promoter group company, Rs. 6.2 crore as advance to suppliers and Rs. 7.8 crore security deposit.

At the upper end of price band at Rs. 49, company is offering shares in the primary market at PE multiple of 14.3x, which is irrational and unjustified, given its small size, low capacity utilization and poor financials.

 A clear avoid on fundamentals!