SRS Limited IPO Review (Avoid)

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Review By MLR Securities Private Ltd on August 25, 2011

Issue Period: 23rd Aug - 26th Aug
Price Range: INR 58-65
Issue Size: INR 203-227.5 Cr
Mcap: INR 808-905Cr
IPO Grading: ICRA IPO Grade 3
BRLM: Karvy, IDBI Cap, SPA
Promoter: Dr Anil Jindal , Sunil Jindal
Listing: BSE & NSE

SRS Limited is a diversified company with a business portfolio comprising of Cinema Exhibition, Retail, Food & Beverages and Manufacturing & Retailing of Jewellery.

SRS Cinemas is the cinema exhibition brand under which the company operates 11 properties across 6 cities having 30 screens and 7,608 seats. In the food & beverages segment, the company operates 11 food courts under the SRS 7dayz brand, 3 fine dining restaurants under the brand 'Punjabi Haandi' located at Faridabad, Gorakhpur and Ludhiana. The company offers catering services through its brand SRS Banquets, located at Faridabad. The SRS 7dayz brand also sells packaged snack foods through the company's own retail stores as well as through other retailers.

The company operates a chain of retail stores under the brand name of SRS Value Bazaar that offer various FMCG products, crockery, appliances, accessories, etc. SRS Fashion Wear is the other brand under which the Company retails multi‐brand apparels. The Company has 23 retail stores in North India with a total floor space of more than 0.132 mn. sq. ft. The company sells gold and diamond jewellery under the brand name of SRS Jewells, which is procured from its 100% subsidiary having manufacturing facility at Patparganj, New Delhi and through third parties. The Company at present has 3 retail showrooms at Delhi, Faridabad and Palwal and 2 wholesale outlets at Chandni Chowk and Karol Bagh, Delhi. Recently, the company has also started the manufacturing facilty at Noida SEZ.

Promoters

Dr Anil Jindal, Sunil Jindal, Bishan Bansal and Raju Bansal are the promoters of the company. Dr Anil Jindal is the chairman of the company and has experience of more than 25 years in areas of finance & leasing, entertainment, cinemas, food & beverages, retail and real estate. Sunil Jindal is the managing director of the company. He is the founder promoter of the company and has an experience of more than 11 years in management of Mall, Multiplexes, Retail Chain and Corporate Planning.

Objects of the Issue

• To add 51 screens with a total seating capacity of 13,840 seats by 2013 - Rs 101 Cr
• To set up 24 food courts (SRS 7 Dayz brand) and 9 (Punjabi Haandi) restaurants - Rs 40 Cr
• To set up 29 retail stores (SRS Value Bazaar & SRS Fashion Wear) - Rs 54 Cr
• To set up jewellery manufacturing facility and to add 17 retail store by 2013 - Rs 16.7 Cr

Valuations

The company's market cap is Rs 905 Cr on an upper price band of Rs 65. SRS is asking for post issue valuations of 21-24 times FY11 EPS of Rs 2.67. Looking at price to book value ratio the stock is priced at 1.7 times its FY11 book value of 38 post issue on an upper price band of Rs 65.

• Profitability: The company's topline grew at a CAGR of 109% in the last six years which has been mainly driven by its cash and carry business during FY08 & FY09 and later due to growth in jewellery manufacturing and trading businesses during FY10 and FY11. In addition to the contribution from these businesses, the other businesses; i.e. cinemas, retail and food courts have also shown steady growth and contributed to the revenue growth.
• Jewellery segment major revenue contributor: SRS jewellery business has been the key revenue and profitability driver for the company during last two years, contributing almost 71% of revenues and 93% of operating profits during FY 11 as against 3% of revenues and 2% of operating profits in FY 09.
• Declining margins: The overall operating profitability margins of the company have consistently declined over the past years due to higher revenue contribution from lower margin businesses, i.e. retail and jewellery businesses, which offer EBIT margin of around 2% and 6% respectively during FY 11.
• Poor return ratios: The RoCE declined sharply in FY09 due to decline in profit margins in retail business following the economic slowdown as well as increase in capital employed following the commissioning of new stores and cinemas. Despite a satisfactory RoCE in FY10 and FY11, the RoE in has remained below satisfactory levels due to consistent equity infusion from the promoter group, thereby resulting in lower leveraging. The RoE has slightly improved in FY11 despite a modest increase in RoCE, due to increase in leverage levels.
• Comfortable Leverage: Increased working capital debt has resulted in increase in gearing levels during FY 11 to 0.90 times from 0.59 times in previous year; however it continues to remain comfortable.

Concerns

Almost 90% of IPO proceeds are proposed to be utilised in three businesses, Cinemas, F&B and retail, which accounted for around ~20% of the company's EBITDA in FY10 and FY11. While the company has identified the cities, it is yet to identify the proposed locations for the outlets to be set up from IPO proceeds, ability to timely identify them and commence satisfactory operations will be critical to maintain future profitability. Overall weak profit margins due to lower value addition in retail business and jewellery business, which accounted for almost 95% of company's revenues in FY11.