VMS Industries is entering the capital market on 30^th May 2011 to raise Rs. 25.75 crore via a public issue of 64-72 lakh equity shares of Rs.10 each, priced in the band of Rs. 36 to Rs. 40 per share. This small IPO, comprising of 39-42% of the company's post issue paid-up capital, closes on 2^nd June 2011.

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. VMS 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.

The company is engaged in ship recycling activities in the Sosiya Ship Breaking Yard in Bhavnagar, Gujarat since only the last 2 financial years. Infact, ship recycling business was entered into as an opportunistic move only. In FY07, company acquired dealership of Honda Two Wheelers in partnership with one of the promoters while in May 2008, it started undertaking offshore business activities as well.

The ship recycling plot on which the company presently operates, is taken on lease from Gujarat Maritime Board, for 5 years, up to 16^th March 2012. Hence, the lease is required to be renewed in the next 10 months, else faces risk of cancellation.

Objects of the issue comprise modernizing the ship recycling plot with investment of Rs. 5.58 crore, setting up of corporate office in Ahmedabad for Rs. 1.1 crore and long-term working capital needs to the tune of Rs. 17.4 crore. Hence major portion of IPO proceeds will only finance the working capital. Also, the machinery to be purchased for modernising the plot will be second-hand, without any manufacturer warranty and will thus also require higher maintenance costs.

For FY10, company reported revenue of Rs. 29 crore and earned net profit of Rs. 2.6 crore. During 9mFY11, revenue rose to Rs. 50 crore, but net profit earned was only Rs. 2.5 crore on equity of Rs. 10.04 crore. Company has very high debt of Rs. 57 crore on networth of Rs. 23 crore, as at 31^st December 2010, resulting into extremely high debt-equity ratio of 2.5:1. What is another big negative is the sudden eight-fold jump in inventory from Rs. 7 crore, as of 31^st March 2010, to Rs. 59 crore, as of 31^st December 2010, without supporting proportionate rise in business volumes. Clearly blocking Rs. 59 crore in inventory for a business, with networth of Rs. 23 crore (inventory is over 2.5 times of company's networth) and annual net profit of Rs. 3 crore shows poor business sense and operational mis-management. 

While its BRLM Ashika Capital is well-known to bring "unhealthy" companies to the primary market, the IPO has been graded 1 on a scale of 5 indicating poor fundamentals by ICRA.

Such poor fundamentals do not warrant a call on valuation, but just for the record, at upper price band of Rs 40, share is being issued at ridiculous PE multiple of 12 times, based on expected EPS of Rs. 3.3 for FY11. On listing, company does not remotely deserve market cap of Rs. 66 crore and enterprise value of Rs. 119 crore. Fair value of the stock is not above its face value of Rs. 10.

Given the very limited operational history, cyclical nature of the ship breaking industry, working capital intensive nature of business and poor fundamentals, the issue is a clear avoid. It is definitely one of those issues where you don't want to be trapped.