11 June 2013

e-Dynamics IPO: A hi-tech sounding co's not so hi-tech biz :VS Fernando, Financial Analyst & Columnist

e-Dynamics Solutions: Sounds like a hi-tech e-commerce company but, hardly has any infrastructure for e-tailing despite having already raised more than Rs 15 cr as equity. Ironically, the so called e-tailing company’s current activity is dominated by investments, loans and advances!
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e-Dynamics Solutions: Sounds like a hi-tech e-commerce company but, hardly has any infrastructure for e-tailing despite having already raised more than Rs 15 cr as equity. Ironically, the so called e-tailing company’s current activity is dominated by investments, loans and advances!

When even blue-chips tread cautiously in these days to enter into the main frame platform of the stock exchange, Kolkata’s SMEspecialist investment banker, Guiness Corporate Advisors, is introducing its sixth IPO in as many months. Like most of its past introductions, the present one too has questionable credentials. But, that does not deter the investment banker from underwriting the entire issue amount of Rs 15.60 cr.  How such lack luster IPOs are having a smooth sailing is indeed a mystery.

Since the advent of the SME platform in February 2012, twenty eight issuers have chosen the route of which, surprisingly, only three went to the National Stock Exchange (NSE). An interesting aspect of the SME-IPOs listed so far is, fundamentally strong companies that went to NSE are quoting at a discount while the ones who had questionable credentials and got listed on the Bombay Stock Exchange (BSE) are boasting fabulous premiums albeit irregular trading.

Incidentally, all the eight SME issues managed by Guiness Corporate have gone to the BSE and, except one, none of them has regular trading. If the investment banker is not able to ensure regular trading for the issues managed by him, how is he allowed to enjoy a monopoly-sort in the SME arena?

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The quality of issues that hit the SME platform of BSE and the manner that these IPOs have created the ‘club class’ culture give a feeling that sooner than later the SME Platform will meet the same fate of OTCEI. The below-the-grade fundamentals of the BSE-SME IPOs raise serious doubts about the role of the merchant bankers and their covert understanding with BSE. If BSE were to offer a platform to obscure investment companies with miniscule promoter contribution and allow them to have names that sound hi-tech, whose interest are the regulators serving?

Coming to the present lPO, the New Delhi-registered e-Dynamics Solutions Ltd (e-DSL), though incorporated nearly thirteen years ago in July 2000, had a revenue of Rs 17 lakh and profit of less than a lakh in fiscal 2011 despite having a net worth of more than Rs 3 cr. Even while it did not have a visible profit, the company collected unreasonable premiums in 2006 (Rs 30 per share), 2008 (Rs 90), 2009 (Rs 40) and 2010 (Rs 40) through private placements. Most of these shares were subsequently bought by the promoters at par! The entire Rs 2.43 cr share premium collected till 2010 by the company was used to issue a bumper 2:1 bonus thereby bringing down the cost of promoters to less than Rs 5 per share.

Interestingly, e-DSL made hefty private placements at par during 2012 and 2013 thereby enlarging the capital base from Rs 3.70 cr to Rs 15.43 cr. While nearly Rs 7 cr equity has been issued at par in April this year to the `club class’ investors, the company now wants to raise Rs  6.24 cr equity at a premium of Rs 9.36 cr  (Rs 15 per share) from the investing public.

In first 10 months of fiscal 2013, the company’s profit was less than Rs 3 lakh and accumulated reserves after 12 years of existence amounted to just Rs 8 lakh! The revenue and profits were so dicey that net cash flow from operations was extremely negative. Then, on what basis is e-DSL charging a premium of more than Rs 9 cr? The company, which boasts of into e-tailing (online retailing), has deployed most of its funds in investments in shares and securities, deposits, loans and advances!

Whereas funds deployed in `assets-gross block’ amounted to only Rs 0.29 cr, more than Rs 5 cr is locked into investments whose details are not known. The company has parked as much as Rs 7.43 cr in `deposits, loans and advances’ whose nature is not disclosed in the offer document. Have the loans and advances anything to do with the preferential allotments made at par to the `club class’ investors during 2012 and 2013?

The company, whose bottom line is less than 5 lakh against its existing capital of Rs 15.43 cr, proposes to increase the capital to over Rs 21 cr through the public issue. Looking at the company’s past track record and current financials, dividend return is out of question for the foreseeable future. If anyone is hoping for capital appreciation, it is possible only through some manipulation by the promoters and their market makers. Moreover, what great long term prospects can one forecast for a company whose promoters’ stake is just 20 percent and that too at an average cost that is only a fifth of the public’s?

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