Indian IPO – Review and Analysis of Aster Silicates reveals it to be another High-Priced Junk Offering

India has seen numerous junk initial public offerings (IPOs) in the last few months which have either led to serious losses for the investors or have led to their not getting subscribed.Even good IPOs like SJVN are leaving nothing on the table for Indian investors.The list of the IPOs like Texmo Pipes,Jaypee Infratech,Tarapur Transformers ,Nitesh Estates etc. are down anywhere between 10-50% despite the broad market indices being at the highest level in the last couple of years.

High Level Review of Aster Silicates

The company plans to raise around Rs 53 crores (~$12 million) which would dilute the promoter stake from around 71% to 51%.The company has put a price band of Rs 112-118 per share and has got a Rating of 2 out of 5 from Brickworks Rating .Can’t understand why it did not get 1 .The company was initially started as a steel producer before manufacturing sodium silicate ( Na2oSio2) or liquid glass which is used in the drilling,food and cosmetics.This company has  its production facilities in Gujarat .Here are the main features of the company distllied from its DHRP

Negatives

1) Poor  Margins – The company runs on very low margins of 11.5% Operating Margin and 4% Net Margin over the past 3 years.The Raw Material used by the company is derived mainly form Oil and Gas whose prices make the margins very volatile.I would be careful in investing in a company with such low margins as they can easily go into the red being a small cap with little pricing power.

2) Very High Customer and Supplier Concentration – The top 5 customers account for 81% of the company’s revenues.That is not unusual for a company of this size but a risk factor nonetheless.Its top 3 suppliers also account for 97% of the raw material supply

3) Negative Operating Cash Flows and High Debt – The company has seen negative cash flows over the last 3 years despite being profitable and has a debt equity  of 0.8.Again a big negative for a value investor.

4) Management does not seem to have a good track record – The Management does not have a good track record.The promoters of this company were involved with another chemical company which was sued by Nirma .Their are cases against the promoters for dishonoring cheques.

Positives

1) High Growth and Improving Margins – The company has shown a 100% Growth over the last 2 years and its Operating Margins has also improved from 9% to 15%.This shows that the company is reaping the advantages of scale

Summary

This stock is definitely a stupid buy at these high valuations.Given the commodity nature of this business,low margins and negative operating cash flows, asking such a high multiple makes very little sense.At Rs 4-5 crores of annualized net profit the valuation works out to be too high for such a risky,low margin,small cap company.Anybody investing based on fundamentals will have to be a little bit crazy.