Ambition Mica IPO scan by VS Fernando

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VS Fernando's view on Ambition Mica IPO

Ambition Mica: Established brand and financial track merit price though lean industry margins, corporate governance issues and poor market-making of SME listings take the sheen away.

Whereas the so called official `market makers’ of BSE’s SME listings are unable to attract buyers, more than 40 unscrupulous scrips are currently “buyer-backed” on BSE’s mainframe! In both the cases, the country’s oldest stock exchange has failed to protect the investing public’s interest.

The OfferFresh Issue of 10,74,000 equity shares of face value of Rs 10 at a price of Rs 40 each aggregating to Rs 4.3 cr. The IPO will constitute 27.3% of the post-issue paid up equity capital of the company. Of the public offer, 54000 shares are reserved for the `Market Maker’ – BCB Brokerage. The lead manager to the issue, Pantomath Capital Advisors, has underwritten the entire issue.  Investors have to apply for a minimum of 3000 shares or Rs 120000. The shares are to be listed on the SME platform of BSE.

Issue Object Besides achieving the benefits of listing, the object of the public issue is to fund the following: Working Capital Rs 3.5 cr (81.5%), General Corporate Purpose Rs 37.6 lakh (8.7%) and Issue Expenses Rs 42 lakh (9.8%).

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VS Fernando

Financial Analyst & Columnist|India Arthik Research

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Business & Background 

The Ahmedabad-based Ambition Mica Ltd (AML) was incorporated in March 2010 in order to undertake the business of laminated skin, laminated sheets including laminated door skin, mica for industrial, commercial and domestic uses, etc. Even though Sureshbhai Patel, Ashwinbhai Patel, Govindbhai Patel, Veljibhai Patel and Prahladbhai Patel were the initial subscribers to the Memorandum of Association of AML, Veljibhai Patel and Govindbhai Patel are said to be the promoters of the company. The father and son duo Veljibhai Patel and Govindbhai Patel claim to have long experience in marketing of laminates, plywood etc. which has enabled them to grow at high pace in short period of time. Before entering into manufacturing of laminates they have acquired experience in marketing of laminates under the firm Anand Timber Mart.

AML reportedly commenced commercial production of high pressure laminates in April 2012 and doubled the capacity in September 2012.  The company has increased its capacity further in April 2014. AML is claimed to be one of the leading manufacturers of mid segment decorative laminates and door skins. Within a short period of its existence, the company has reportedly garnered 8% market share in 1MM mid segment brands. AML markets laminates under brands like Antique, Art Lam, Antique Aurum, Antique Colourcore and Antique Natural Wood. It also markets door skin under brands like Beautique, Texas, Micro Touch, Antique Natural Wood and Door Touch. More importantly, all the brands are said to be owned by the company. AML claims to have a strong network of about 20 distributors and 2545 dealers serving both industrial and consumer applications and have been able to establish a presence in west and south India.

Financial Performance

AML has a decent record to speak about. From a capacity of 6.63 lakh laminate sheets in 2011, the company has gradually expanded the capacity to 13.3 lakh sheets. In other words, the company’s productive assets have grown from Rs 6 cr in 2011 to Rs 12 cr in 2014. Its capacity utilization has increased from 64% on 6.3 lakh in fiscal 2012 to 69% on the expanded capacity (13.3%) in fiscal 2014.   

Financially, AML’s top line has leapt from Rs 13.7 cr in FY12 to Rs 35.6 cr in FY14. For the first ten months of FY15, turnover amounted to Rs 31.3 cr. The company’s operating profit has grown from Rs 2.05 cr in FY12 to Rs 2.99 cr in FY14. For the ten months up to January 2015, operating profit worked out to Rs 3.79 cr. The operating margin was at 15% in 2012, which dropped down to 8% in 2014. However, the margin has recovered to 12% in 2015. The company’s net profit which was a modest Rs 87 lakh in FY14 has leapt to Rs 1.43 cr in ten months of FY15.

Is the jump in bottom line real or is it a pre-issue bloom? According to the management, the fourth quarter is generally the peak for the company and full year profit would be much higher than the profit of first ten months. The management attributes the impressive FY15 performance for the enlarged capacity and production as well as expansion of its marketing network.      

Valuation & PerceptionIf the projections in AML’s offer document were to be believed, the company’s capacity would increase to 17.69 lakh sheets in 2015 and it would achieve a capacity utilization of more than 70% (12.4 lakh sheets) in FY16.  With such impressive operations, the company’s bottom line should be very attractive as compared to its post-issue equity base of Rs 3.97 cr.

As regards pricing, AML compares reasonably well with its peers in the laminates industry. However, a couple of factors may weigh against AML’s scrip. First, laminate industry is currently discounted poorly on the trading floor as none of them is in the dividend list at present. Second, though AML’s operational track record speaks well, the promoters score poorly on the corporate governance front. The company has, in the past, received notices for short deduction of TDS and delay in filing of returns. AML has also failed/delayed in complying with statutory requirements such as obtaining approvals, registration of special resolutions, filing of form for appointment and resignation of directors, etc.

Further, another closely held company of the promoters, Velsons Laminates Pvt Ltd is also setting up a laminate project at a cost of Rs 7 cr whose annual capacity is said to be about 12 lakh sheets. This could create a conflict of interest and curtail the prospects of the public company.

BSE-SME Track

No doubt, AML’s fundamentals may justify its offer price. But, will it fetch adequate returns on the trading screen? SMEs’ track record does not exude much optimism. Interestingly, the scrips’ that have strong fundamentals have failed to bring decent returns while many a SME that lacked credentials has commanded huge premium post-listing without any basis.

Another factor that affects SMEs’ prospects is the poor liquidity. As the minimum investment value is invariably more than Rs 1 lakh, retail investors find it unaffordable. Thus, only a club of friendly investors participate in the SME IPOs and the scrip prices are largely influenced by the market makers in connivance with the promoters and their cozy club of investors. Once the initial euphoria is over, the SME scrips do not find any investors.

The trading statistics of SMEs reveal that none of the scrips has so far continuously been traded. The BSE-listed SMEs have been traded only 38% of the days since their listing. Scrips like Lakhotia Polyester, Kavita Fabrics, Sangam Advisors, India Finsec, Ace Tours, Stellar Capital, Money Masters, Agrimony Commodities, Polymac Thermo, Siddhi Vinayak Shipping, Karnimata Cold, R & B Denims, GCM Capital, Bhanderi Infra, Carewell Industries, Sirohia & Sons, Aryaman Capital, Starlite Power, Raghuvanshi Agro, SSPN Finance are traded not even one-fifth of the days since listing.

Source: India Aarthik Research

The liquidity record of NSE-listed SMEs is only a shade better. The seven NSE-SMEs have collectively been traded 42% of the days since listing. While the best performer, Momai Apparels, has been traded 99% of the days, Opal Luxury could get quotes only 15% of the days.

Source: India Aarthik Research

Manager’s TrackAs regards the lead manager’s track, Pantomath seems to have a better average than both BSE and NSE. While the credit for top most in terms of liquidity goes to Momai, the first IPO managed by Pantomath, Siddhi Vinayak Shipping has a pathetic record of just 18% of trading.

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