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February 16, 2011Acropetal Technologies IPO – Not Junk but Not Compelling Either
February 16, 2011In the season of scams and scandals when the erstwhile high flying mid cap and small cap names are getting battered for management issues,Sudar Garments has surprisingly come out with an IPO despite spotty corporate governance issues.Like so many of the junk IPOs coming out in 2010,this one too should managed to raise money through market operators.The modus operandi of these IPOs is mostly pump and dump where a few unscrupulous and shady brokers are responsible for managing the issue.With the stock market regulator SEBI refusing to crack down on these blatant manipulation,the pipeline of crappy small cap junk IPOs in the Indian stock market keeps growing.Thought that the current market crash would have removed them,but apparently not so as the junk IPO industry keeps growing stronger.This despite the more than 50% crash on issue day of Omkar Chemicals ( a junk IPO).Here are some of the notable negatives of the issue which has been given a 1 out of a 5 rating by rating agency CRISIL (not that the rating help the retail investors).
1) Bad Management – “One of the independent directors is closely involved in business activities and is known to influence the promoter’s business and financial decisions. Other independent directors do not have sufficient understanding of their role and lack the ability to exercise management oversight.” – Crisil Report , not much more to say here
2) Bad Sector – The Textile Sector is highly competitive and low margin one with very few companies having decend margins.Sudar Garments is a small player in a field of upteempth players in this industry.You could buy a hunderd other listed textile issues at a better valuation.
3) High Debt and Negative Operating Cash Flows – The financials of the company are a complete mess with a debt equity of greater than 1.5 and negative cash flows for the last fiscal year as well.The margins are quite low with high amount of receivables forming almost 40% of the fixed assets.
Summary
The company is trying to raise almost Rs ~60 crore by diluting almost 50% of the equity giving it a market cap of Rs 120 crore which implies a per-IPO P/B of 6x and P/E of almost 30x.This issue can only go through the help of non fundamental factors and looks like it will,otherwise why would a promoter and its investment bank try push such a crappy stock in such a market.Note the investment banker for this stock has brought out crappy IPOs in the last year like Tirupati Inks. Ashika was also one of the groups implicated by IB in the agri mid cap stock rigging scandal recently.