Saturday, December 25, 2010

IPO ANALYSIS: C. MAHENDRA EXPORTS LIMITED – ROUGH AND UNPOLISHED – AVOID.



Do not invest in a business, one does not understand it - an adage. Diamond business is one such. Unlike gold, the diamond as a commodity is not standardized, in a way, that the man on the streets understands its intrinsic and true value. And most importantly, being a totally family and close circle business, there is complete lack of transparency in the business, with only the promoter manufacturers / traders knowing what is what, and the buyer is more often completely in the dark. Even the bankers who have been financing the trade for decades, concedes, valuation is a matter of concern. It has limited resale value, unlike gold and silver, and is illiquid in comparison. With the exception of some, the companies in this segment lack corporate governance and are subjected to Income Tax and Customs raid periodically. The recently listed Goenka Diamonds and Shree Ganesh Jewellery have given negative returns to the investors. Even the shares of the established players like Classic Diamond, Suraj Diamond and Shrenuj Diamond are not fancied in the exchanges.


Now we have one more IPO from the same segment. C. Mahendra Exports Limited, is entering the capital market on 31-12-10 with issue of 1.50cr equity shares of Rs 10 FV, in the price band of Rs 95-110. The issue closes on 06-01-11.


Mahendra C. Shah, Champak K. Mehta, Pravin C. Shah, Pravin K. Mehta and Sandeep M. Shah are the promoters of the company.



YES Bank Limited and Anand Rathi Advisors Limited are the BRLMs. Anand Rathi is not known for bringing quality issues at attractive valuation. In the recent past, the two IPOs managed by them - Euro Multivision and Pradip Overseas are trading at discount to issue price and retail investors have suffered losses.


C.Mahendra Exports / Group is an integrated diamond and diamond jewelery player, from sourcing of rough diamonds, trading of rough and polished diamonds, processing of diamonds and manufacture of diamond jewelery.


The group has marketing entities in Hong Kong and USA to cater to some of the major markets for cut & polished diamonds and diamond jewelery across the globe. Currently, the Group has around 8 marketing offices spread across Surat, Mumbai, Delhi, Kolkata, Hong Kong, New York, Los Angeles and Antwerp.


At present the Company has two facilities for cutting and polishing of diamonds at Varachha and Udhana, in Surat.




OBJECTS OF THE ISSUE:


The fund requirements of the objects are as follows:

To set up of a diamond processing unit at Gujarat Hira Bourse, SEZ, Ichchhapore, Surat

To set up of a jewelery manufacturing unit at Mumbai.

For financing setting up retail of outlets, branding and for general corporate exps.




MATTERS OF CONCERN:



1. The company faces execution risks in the retail business, where it has no track record.

2. The diamond processing facility is geographically located in one area. Any localized unrest, political disturbances in the area could adversely affect results of operations. Retention of experienced employees is a challenge for this industry. The industry is already facing skilled worker crisis due to non availability.

3. The are issues with respect to the corporate governance. The company is involved in Income Tax litigation, had paid penalty for violation of Customs rules, Auditors qualification on accounts, suspension of sight holders status by DTC etc.,

4. Competitive business- depends on luxury market like USA and HK for business. Any slowdown in that economy will affect the company’s fortune.

5. Clash of interest. Promoter group is involved in similar business.

6. The expansion project is not apprised by any bank /FI and fully equity funded.



FINANCIALS:
TOTAL INCOME -  08-09 RS 1421CR  NET PROFIT RS 21CR
                             09-10 RS 1632CR  NET PROFIT RS 23CR



VALUATION AND RECOMMENDATIONS

The company is likely to post an EPS of Rs 5, for FY 11, on the post issue capital of Rs 60cr.  At Rs 95-110, the company is demanding a valuation of 22x, which is very expensive.


Other than Rajesh Exports Limited (Leading gold jewellery exporter), the stocks in this sector are not fancied by investors. Goenka Diamonds and Shree Ganesh Jewellery have disappointed the investors.

The diamond industry is very fragmented, with low value addition and is characterized by high competition.   Players typically have low margins and the working capital intensity is high arising from the long conversion cycle involved as well as delays in realization of export proceeds, which is more pronounced during demand slowdown in the key export markets.  The  company’s  revenues  and margins  have  shown  considerable  volatility  in  the  past  .The  businesses  remain  highly working  capital  intensive,  which  affects  the  company’s  ability  to  generate  free  cash  flows  and  has  also  led  to  an adverse capital structure.  IPO grade 2 by ICRA, indicating below average fundamentals. AVOID SUBSCRIPTION.


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