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February 14, 2011Fineotex Chemicals (FCL) is a Maharashtra based small chemicals company which is coming out with an IPO for 4.2 million shares at Rs 60-72 to raise Rs 25-30 crores with a total market cap of around Rs 42-50 crores.The company has a 5000 tons plant and is expanding by 13000 tons.The company has little resources by way of cash and it seems strange that a Rs 15 crore company would raise money from the capital markets rather than raising more debt which seems low at around Rs 80 lakhs.Can’t find much to say anything positive except that there are no lawsuits pending against the promoters.Here are the negatives.
Negatives
1) Negative Cash Flows and Very Limited Operating history – The company has an operating history of around 5 years and in almost all years it has seen negative operating cash flows.
2) Customer Concentration and Small Size – The company evidently has limited bargaining power with 5 of its customers accounting for more than 40% of its revs.The DRHP mentions customers as Clariant,BASF which are much bigger in size and evidently the company would have little bargaining power due to its super small size
3) No Land,Machinery Orders for Expansion – The company from the DRHP with SEBI has not got the land nor ordered the machinergy which implies that it might take a long while for that to happen.
4) Little Management Depth – The company seems to be totally dependent on its single promoter.The rest of the mgmt is family and would seemingly be all at sea without the patriarch.
5) Financials and Valuation – The company is too small and with limited operating history so it makes it difficult to make a call.However the decrease in cash and assets is puzzling for a small growing company.For FY09,the company made a profit of Rs 3 crore implying a P/E of 14-17x.The P/B pre IPO is around 3x and post IPO would be 1.5x.
Summary
Omkar Specialty Chemicals was a major disaster for all the investors who decided to gamble on small cap IPO junk.Gambling on FCL in this environment does not make any sense,would make more sense to gamble your money in a casino.In this market you would have a much better chance of returns.