SRS IPO launched, what should you do? Buy or Avoid

Written by: Shoaib Zaman

SRS IPO. Should you buy it or avoid
The Initial Public Offer of SRS will be launched today. What should your strategy be in this case? We present the case with the verdict provided at the end.

The company: Launched in 2000, it was first named as SRS Commercial. Then in 2005, its name was changed to SRS Entertainment. The company is in the business of cinema multiplexes, food and beverages, retail, FMCG and jewelery.

It plans to raise Rs 525 crore in order to facilitate expansion. To fund the capital expenditure required for the expansion of the business via the ownership model, lease model and franchise model.

Promoters: There are two individual promoters Sunil Jindal (0.51%) and Raju Bansal (0.17%), along with 10 corporate bodies (65.18). There are five other individuals of the promoter group cornering 1.61%. Other investors which includes, individuals, corporate bodies, HUF hold another 32.54%.

The interesting part is that SRS Real Infrastructure is a sister company to SRS entertainment.

Now, SRS Real Infrastructure was listed in 1995. The capital market regulator, Securities and Exchange Board of India (Sebi), investigated the company and found four promoters of the company to be involved in malpractices while offering IPO. Consequently, SEBI had banned the promoters for four years from accessing capital markets. That is the shady part of the IPO.

Investment thesis:

-The company has seen its income grow at a very fast pace. Roughly the revenue grew at the rate of 144% annually.
-Its net profit margin is around 2%, at par with its peers in the retail space. Although this is lower than the jewelry players in the market.
-Going forward the company will benefit from its presence in tier 2 and tier 3 cities, where the competition is less and hence less margins with decent volumes can be maintained.
-The company aims to reduce its debt-to-equity ratio via the IPO raise from 0.9 times to approximately 0.25 times.
-Looking at its valuation, the company's price-to-earnings ratio stands at 16-18 times. This less half of Titan industries which is trading at 35 times.

Risk factor (anti-thesis)

-The company plans to invest most of the amount in the cinema multiplex segment of the business. Even though the company earns majority of its income from jewelry.
-ICRA, the rating agency, has assigned a grade 3 indicating that the business fundamentals are average.
-The company has applied for 36 trademarks, which are pending for approval according tot he draft prospectus. The problem is that the company is not looking at the exclusivity of the trademarks which can hamper its brand in future.
-The management's links with SRS real Infrastructure which had links to malpractices is also a deterrent.

Verdict: If you do not have a strong risk appetite then avoid this IPO. And in case you decide to invest in the IPO, do not invest more than 5% of the portfolio.

(You can read the entire prospectus here)

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