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Money Sep 27, 2012

RCL Retail: Promoters’ stake provides food for thought!

by VS Fernando

Offer
Fresh issue of 57.95 lakh equity shares of Rs 10 each at par aggregating to Rs 5.80 crore. The issue comprises promoter's contribution of 21.05 lakh shares (Rs 2.11 cr), reservation for market maker 6.15 lakh shares (Rs 61.50 lakh) and public portion of 30.75 lakh shares. The non-promoter portion of the offer will constitute 30% of the fully diluted post-IPO equity capital of the Company.

Offer

The lead manager, Guiness Merchant Bankers (P) Ltd, has underwritten 30.75 lakh shares and the balance (6.15 lakh shares) is underwritten by the "Market Maker", Guiness Securities Ltd, who is an associate of the lead manager. Applicants to this issue should apply for a minimum of 10,000 shares (Rs 1 lakh). The shares are to be listed on the SME platform of BSE.
Object
The objects of the public issue are as follows: Setting up of eight new retail outlets (at a cost of Rs 69.40 lakh); Setting up a food grain processing unit (Rs 472.90 lakh); Strengthening supply chain management (Rs 38.90 lakh) and funding of general corporate expenses (Rs 100 lakh).
Lineage
Even though the present offer may be the first public issue from the little known promoters of RCL Retail Ltd (RRL), they are not new to the investing public. They have a company in the public domain, RCL Foods Ltd (RFL), which was taken over by them in 2008. Incidentally, RFL has some of the objects similar to that of RRL! RFL is engaged in the business of manufacturing and processing of agro based, ready to eat products which are also proposed to be undertaken by RRL under the expansion plan.

The promoter-directors, Lodha brothers Nitesh and Shreyans are only in their 20's. Elder one Nitesh (26) claims to have 5 years of experience in agro food processing, retailing of fast moving consumer goods, packing, retail marketing, sales promotions and general administration. The younger one Shreyans (21), though said to be on the company's board since 2010, has completed his Bachelor degree in business administration in 2012.

How serious are RRL's young promoters? In the pre-issue capital of Rs 6.5 cr the total promoters' stake was only 10.3% and in the post-issue capital of Rs 12.30 cr it would be 22.56%! Ironically, the promoter group company, RFL, which held 3 lakh shares in RRL at the end of fiscal 2012, has now offloaded its holdings!

Whereas private placements are banned in the country, RRL has liberally made preferential allotments to public shareholders. A significant portion of RRL shares were sold in the year 2011 when the group company RFL's share was quoting near its peak of Rs 110. Post-RRL preferential allotments, RFL's shares crashed to Rs 20.

And, what's the capability of the young promoters on the operational front? RFL's revenue has steadily declined to Rs 1.5 cr in fiscal 2012 from Rs 5.15 cr in 2010. In last three years, its accumulated deficit has increased from Rs 31 lakh to Rs 102 lakh. Like in RRL, the promoters have kept their stake abysmally low (25.4%) in RFL too.

Business

RRL is reportedly engaged in the business of retailing of ready to eat snacks, bakery products, cookies, confectioneries, namkeens, chutneys, mouth-fresheners, etc. The company claims to operate through two retail stores located in Chennai. Nevertheless, the trademark "RCL" is not owned by the public companies but promoters' father, Ratanchand Lodha who has allowed the trademark to be used without any fee. RRL's new manufacturing projects are expected to commence production by June 2013.

Performance

In fiscal 2012 RRL's sale of products traded increased to Rs 6.42 cr from Rs 88 lakh in the previous year. With the help of Rs 24 lakh `other income', the company posted Rs 27 lakh EBITDA for the year. Though posted a net profit of Rs 7.46 lakh (Rs 2.11 lakh) the company had a negative operating cash flow of Rs 2.41 cr and Rs 1.97 cr in 2012 and 2011 respectively. Moreover the company's bottom line was too low to service the pre-issue capital of Rs 5.54 lakh. What's intriguing is, while the revenue of the company that taps the market has leapt in fiscal, the other listed company of the group which is also engaged in related line of business has reported significant drop in sales.
Valuation

Since RRL is offering shares at par, there is nothing to comment about the price. But, will it fetch returns in the near term? Surely dividend possibilities are ruled out. Nonetheless, if RCL Foods' price behavior is any indication, notwithstanding earnings to support, the promoters' cronies may drive the price as and when they want.

How RCL Retail compares with food peers

(Source: India Aarthik Research)

Manager's Track

The Chennai-based RCL promoters seem have a special liking for Kolkata. Whereas the shares proposed to be listed on the SME Platform of Bombay Stock Exchange, they have gone all the way to Kolkata in search of issue manager and market maker. Their existing listed company, formerly known as Passari Cellulose (of 1995 vintage lead-managed by the infamous Arihant Credit Capital), too was taken over from Kolkata-based promoters.

Do the issue manager Guiness Merchant Bankers and market maker Guiness Securities Ltd have enough experience? RCL is the first IPO mandate for Guiness whose promoters are said to have earlier associated with United Bank, UBI and Comfort Securities. How Guiness will perform as a market maker, especially when the public holding is as high as 77.4% or 95.25 lakh shares, remains to be seen.

Concerns

•Neither owns `Registered Office', nor `Retail Stores' or `Trademark'

•Lackadaisical financial performance by the Group

•Issuer company has reported huge negative operating cash flows in last two years

No agency to monitor deployment of over Rs 7 cr project fund

•Not entered into any agreement with the suppliers for proposed equipments and machines for the project

•Not entered into any contract with contractors as specified in the objects of the Issue

•Not entered into any lease agreement for premises proposed retail outlets

•Objects of promoters' first public company are similar to objects of the company going public

•Operates in a highly competitive market where larger competitors having greater financial strength and many small competitors having cost advantage

*V S Fernando is a veteran IPO Analyst who has been tracking domestic Public Offerings since 1986.

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