RCL Retail IPO: Avoid

A very small firm named RCL Retail is tapping the primary markets to raise funds of around Rs 5.79 crore through the initial public offering (IPO) route. We feel that given the amount it wants to raise, this will be yet another company to get a listing on the BSE SME Exchange. Since its beginning around seven months ago, about eight companies have been listed on this exchange.

RCL Retail offers 57.95 lakh numbers of shares at the issue price of Rs 10 per share at par. One should note that usually a company offers some premium to its face value (Rs 10) while offering shares but this is not the case with RCL. The issue opens on September 27, 2012 and closes on October 1, 2012. The minimum application for the issue is 10,000 equity shares of Rs 10 each which aggregates to Rs 1,00,000.

Of the total proposed 57.95 lakh shares offered, 30.75 lakh shares are available for the public, 6.15 lakh shares are reserved for market makers and the remaining 21.05 lakh shares are for the promoters. Market makers help in trading when the volumes in the counter are very low. Earlier investors use to get stuck up with the stock if the trading volume was very low on the exchange but now a smooth exit is possible. It should also be noted that the promoters are issuing fresh equity shares and their post-issue stake would be increasing to 22.56 per cent of the total shares. The funds raised through the issue and internal accruals would be deployed as shown in the table.

The company was incorporated on September 29, 2010 and within a short span of less than two years it is tapping the market to raise funds. RCL Retail is engaged in the business of trading in ready-to-eat snacks, bakery products, cookies, namkeens, juices, etc and operates through two retail stores located in Chennai. The company’s office and stores have been taken on lease. Looking at the background of the promoters, it becomes evident that they lack the requisite experience to helm such a business. Nitesh Lodha is 26 years old and has five years of experience while Shreyans Lodha is just 21 years of age and joined the board in December 2012. He is a fresh graduate with no experience.

Even on the financial front the company has not performed well. One should not merely look at the total Income which stood at Rs 666 lakhs as against Rs 91 lakhs and net profit which stands at Rs 7.46 lakh - more than threefold on a YoY basis. This is because the EBIDTA margin decreased by 136 basis points to 4.08 per cent and the net profit margin declined by 121 per cent to 1.12 per cent, which is very low. Further, even the cash flow for FY12 was negative.

RCL Foods is a listed entity and a promoter group company of RCL Retail. It seems that while RCL Foods will focus on production, RCL Retail will carry out the marketing activities, both under the same management. The performance of RCL Foods has also been disappointing for FY12 wherein it sales decreased from Rs 3.16 crore to Rs 1.37 crore while it posted a loss of Rs 0.33 crore as against a profit of Rs 0.05 crore. Overall, we believe that the company even while offering its shares at par value of Rs 10 is expensive. Considering the profit after tax of Rs 7.46 lakh, post-issue the company would be trading at a price to earnings multiple of around 166 times, which is very high. The company is available at very high valuation and offers weak business growth prospects. As such, investors would do well to skip this one.