Midfield Industries IPO Review – Another overpriced small cap Indian Initial Public Offering

Indian market has seen a raft of junk offerings in the IPO market over the last few months.Many of these issues have failed to get subscribed while others which have got subscription in low numbers have rewarded investors with sharp losses.Nitesh Estates,Tarapur Transformers,Jaypee Infrastructure are some of the few junk IPOs which have bombed after getting listed.Most of these issues have fundamentals which would not justify even half of the valuation which they are being offered at. Midfield Industries looks like another overpriced small cap offering.While the fundamentals of the  company are not as bad as some of the above mentioned companies,they are not something to get excited about either.At Rs 9 crores of profit and approximately Rs 180 crore in market cap,the company would have a trailing P/E of 20x which is too high for a company with such a risk profile.The company a strict no buy at these valuations.Here are some of the facts  about this company

1. Negative Cash Flow from Operations – The company had negative OCF in 3 of the last 5 years.Even in the last year it managed just Rs 6 crores of Operating Cash Flow.
2. Low Bargaining Power and High Cash Conversion Cycle – The company’s suppliers and customers are much bigger in size leading to low bargaining power.Its cash conversion cycle increased from 80 days in FY06 to 189 days in FY10
3. Growth is nothing to get excited about – The company’s topline has grown 17% CAGR over the last 5 years which is nothing great.The industry’s CAGR is 20-25%
4. No Differentiation and High Competition– The Company does not seem to have any technology to differentiate itself nor does it have any strong parent behind it.It also faces big competition in packaging space in which it is not a very big player .
5. Low Margins – The company operates on very low single digit margins which means any fluctuation in costs will lead to red ink.It has very low cushion to protect itself .

In Summary, Midfield Industries probably deserves a P/E valuation of 10x rather than 20x which it is being offered at.Could not find any positives about the company which would make someone pay such a rich valuation.Anyone thinking of investing at these valuations would be doing for something other than fundamental reasons.