Monarch Health Services IPO: Avoid

Mumbai-based, eight-month-old company Monarch Health Services (MHSL) announced an IPO last week. This is a fixed price issue of Rs 40 and will close on May 16, 2012. The total shares available for subscription are 15 lakhs that will fetch the company Rs 4 crore. The company wishes to use the proceeds to open 23 new clinics and also to meet the working capital requirements and issue-related expenses.

MHSL is in the business of skin treatments, hair transplant and cosmetic surgery, obesity surgery and laser treatments. It currently operates two clinics in Mumbai and will commence operations in three more clinics in Delhi, Goa and Haridwar this year. It now proposes to open 23 clinics of which seven will be in Tier I cities, eight will be in Tier II cities and a further eight will be in Tier III cities this year itself. Though this aggressive addition looks good, we have some concerns that are worth noting.

First and foremost, one of its promoters, Dr Nishita Sheth, owns another company in the same business, namely Dr Nishita’s Cosmetic Clinic Private Limited. This company has already incurred loss and its net worth has also eroded. This company will not be carrying out any further operations as per the DRHP. We remain skeptical about this IPO as the promoters have already failed to run the same kind of business. Besides, certain equipments and furniture in its current clinics are not owned by the company but have been leased from the promoters for which the company pays a significant amount of rent, leading to the impression that the equipments may have been moved from the loss-making company to the current company.

Besides, of the eight directors, only three have some qualification in the healthcare space while the rest seem to be having backgrounds in finance or accounting. We don’t understand why most of the directors are not from the medical background. Of these directors, one of the directors is allegedly a commerce graduate who has later done a course in software technology. This promoter then worked as a dealer with Monarch Projects & Finmarkets. In fact, there is something vague about the professional background of this director as the DRHP at one place mentions that he worked at Maxgainz Finserve (a promoter group entity) and at another place it is mentioned that he worked at Monarch Project & Finmarkets Ltd.

Another promoter has qualification in the mass communication sphere with skills in Microsoft Office! What is really disappointing is that one of the two key management persons has a non- medical background, having earlier worked with a telecom company. We have some serious issues here as the educational qualifications and professional backgrounds are not in sync with the nature of the business. It should be noted that currently only 13 per cent of the shares are owned by the promoters while post the issue this shareholding will be only 25 per cent.

It should also be noted that the company has declared an IPO larger than its balance-sheet size of Rs 3.84 crore. Financially, its performance has been absolutely disappointing as it made a loss of Rs 44 lakhs on sales of 15 lakhs. Well, one can grant the fact that the business in its initial years would not make significant profit but this is not excusable for an IPO. And if having the requisite experience in a similar line of business does not guarantee profits, then this certainly gives the impression that the management is not capable enough to run the venture.

It’s no small wonder then that the company has negative earnings per share. Its share price is at three times’ premium to its face value. There is no way that this company can command this premium. Recently, two IPOs were cancelled due to poor response by the investors and we believe that investors should avoid this IPO as there are serious concerns about the promoters as well as its overall business.

Note: This issue is of a total of 30 lakh shares of which 12 lakh shares are reserved for the promoters and 3 lakh are reserved for the market makers. Therefore the net issue is of 15 lakh shares at the price of Rs 40. Of this 15 lakh i.e. 50 per cent are available for retail investors while the remaining 50 per cent are available for corporate and institutional clients.