BCB Finance: A Dubious Deal

Of the proposed 35.40 lacs shares, 29 lacs shares would be equally divided into Retail and Other portion. The remaining 6.40 lacs shares would be reserved for the Market Maker Portion, which in case for this company is IKAB securities. The concept of Market Maker was actually introduced by SEBI, which actually helps in trading where the volumes in the counter are very low. Earlier Investors use to get stuck up with the stock, if the trading volume is very low on the exchange. The Market Maker would provide a two way quote for 75 per cent of the time in a day for at least three years. This would help the investors if they want a smooth exit from the stock.

The object of the issue is to augment the capital base and fund requirement so as to increase its operational activities. BCB Finance provides margin funding to its client for purchase of securities, provides loan against shares and trades in shares and securities. The company is highly exposed to capital markets and so the volatile markets could have a significant impact on its business.

The company is very small in size and in fact does not seem to be well placed. It does not have its own offices and functions out of leased office. It is managed so unprofessionally that even the company logo and trade-name are not registered in the name of the company. Besides, the promoters of the company are also involved in a legal proceeding related to certain dispute aggregating to Rs 10.11 crore. This indicates poor creditability of the management and could further impact the goodwill and operations of the company.

Even its financial situation is not looking healthy. In FY11, Total Income of the company declined by 4.70 per cent to Rs 1.54 crore while the Net Profit saw a marginal rise of two per cent to Rs 22 lacs on YoY basis. Even the financial performance over the past five years is also very volatile. Net cash flow from operations in three out of past five years is also negative, which indicates that the growth for the company looks weak.

While going through the financials of the company, we came across an item in the P&L account that was Interest expense. Interest expense in FY2009 was at Rs 55 lacs while it dropped significantly to Rs 8 lacs in FY2010. On the other side to these, Total borrowed funds for the company increased to Rs 365 lacs in FY2010 against being a debt free company in FY2009.

On the valuation front, the company looks very expensive. On a Post issue basis Adjusted EPS for FY11 stands at Rs 0.19 and with the issue price of Rs 25 its Price to earning comes out to be at 131x. It is to be noted here that the average Industry P/E stands at 11.50x. BCB also stands behinds when compared to its peers. Tata Investment corporation, First leasing etc are available at a Trailing P/E multiples of 16x and 5x respectively. Also both the companies have better Return on Net Worth then BCB.

There could be some speculative gain on the listing day as it will be the first one to be listed on the SME exchange. Secondly there would be enough liquidity in the market, which would be provided by the market maker. However we believe it is a must avoid IPO for the Investors. The management of the company has weak creditability, muted business outlook and the very high valuation allows us to give an Avoid for this issue.