Powerhouse Fitness IPO: Valuation too pricey:: expert VS Fernando

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Powerhouse Fitness: Promoters’ omissions & commissions at Santowin Corporation & SVC Resources, hordes of litigations and issue manager’s link to securities scam-tainted group put the IPO on weak footing.

OFFER AT A GLANCE
Issuer Name	Powerhouse Fitness and Realty Ltd
Offer Amount	Rs 7.2 cr
Offer Quantity	24 lakh shares of Rs 10 each
Offer on Total Equity	34.80%
Post-issue Promo stake	65.20%
Post-IPO Capital	Rs 6.90 cr
Offer Price	Rs 30
Application Quantity	4000 & Multiples of 4,000
Offer Opens	29-Sep-14
Offer Closes	09-Oct-14
Listing	SME Platform of BSE
Rating	Nil
Lead Manager	First Overseas Capital
Underwriters	First Overseas (15%) & Transparent Shares (85%)
Market Maker	Transparent Shares
Registrar	Bigshare Services

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The Offer
The present offer from Powerhouse Fitness and Realty Ltd (PFRL) is the seventy-fourth IPO to hit the BSE’s SME Platform. The IPO is a fresh issue of 24 lakh shares of Rs 10 each at a price of Rs 30 a piece. Investors need to apply minimum 4000 equity shares. For managing its IPO, PFRL has hired a little known investment banker from Mumbai, First Overseas Capital. Incidentally, PFRL’s is the first IPO handled by First Overseas!

Whereas the issue manager has underwritten 15% (Rs 1.08 cr) of the issue, the designated market maker, Transparent Shares & Securities who is subscribing 1.28 lakh shares (Rs 38.40 lakh) in the public issue, has committed to underwrite 85% (Rs 6.12 cr) of the issue.

Issue Object

The company proposes to spend the issue proceeds of Rs 7.20 cr on the following: Setting up of 6 additional Gyms in Western and Eastern suburbs of Mumbai Rs 6.37 cr, General Corporate Purposes Rs 0.32 cr and public issue expenses Rs 0.50 cr. However, the project and funding plan has not been appraised by any external agency. The deployment of funds is entirely left to the discretion of the management.

Parentage

The promoter-family has had the two public companies viz. Santowin Corporation and SVC Resources whose track record is hardly worth speaking about. PFRL’s offer document presents Gupta brothers Akshat (26), Managing Director, and   Ankush (30), Whole-time Director, along with their mother, Sushma Gupta (53), as promoters of the company. Interestingly, Sushma Gupta has resigned from the board of the company in August 2014.

In the pre-IPO capital of Rs 4.5 cr, Gupta brothers hold 27.76% each, their mother and father (Ashok Gupta HUF) hold 17.78% and 8.89% respectively. The balance is equally (4.47% each) held by the spouses of the Gupta brothers. In other words, unlike many other BSE SMEs, the entire pre-issue capital is subscribed by the promoter-family. 

The promoters claim to operate a fitness chain in Mumbai and also have the presence in Surat and Jaipur through their franchise. The gyms are reportedly operated under the brand “Powerhouse Gyms” which is owned by Powerhouse Gyms International, headquartered in Detroit, USA. The Gyms are said to be state of the art facilities with services including gyms, steam, aerobics and diet counseling amongst others.

According to the offer document, the first gym was established in May 1999, as “Q’s Fitness Studio” a proprietary firm with Ashok Gupta HUF as its sole proprietor at Santacruz West, Mumbai. After the success of the Santacruz centre another centre was set up at Vile Parle, Mumbai in October 2004. “Q’s Fitness Studio” claims to have signed a Master Licensing Agreement dated in 2005 with Powerhouse Licensing LLC, which provides exclusive right to set up and operate Powerhouse Gyms and to use and license of the Powerhouse Gyms and the associated trademarks in the gyms in India, Nepal, Bangladesh and Sri Lanka. The first Powerhouse fitness centre in India was reportedly set up in November 2005 at Juhu (Mumbai) subsequent to which Guptas’ centres at Santacruz and Vile Parle were converted to Powerhouse.

In February 2013 PFRL was incorporated to consolidate the business and bring all the gyms into a single entity. Currently, PFRL is said to have 12 Powerhouse Gyms in Mumbai (Juhu, Vile Parle, Chembur, Ghatkopar, Mulund, Chowpatty, Prabhadevi, Andheri, Four Bunglows, Malad, Mumbai Central and Colaba. PFRL claims to operate 13 fitness centres in Mumbai and three franchisees in Santacruz (Mumbai), Surat and Jaipur. Further, it has also entered into a leave and license agreement for the opening of Gym in Thakur Complex, Kandivali (East). As on date the company claims to have approximately 9000 members in all their gyms including franchisees.

Financial Performance

Operationally, PFRL has completed just one year.  At the end of March 2014 the company had deployed Rs 4.08 cr equity and Rs 1.69 cr loan funds. Its net block stood at Rs 3.53 cr. For the thirteen and a half month period ended March 2014, it posted Rs 3.89 cr gross income on which operating profit amounted to Rs 49 lakh. OPM was none too impressive at 11%. The bottom line at Rs 8.29 lakh was too small to service the pre-issue capital of Rs 4.5 cr. What’s more, the company’s operations resulted in a negative cash flow of Rs 1.65 cr. Though trade receivables were nil at the end of the period, about Rs 2.66 cr was locked in `short term loans and advances’ and `other current assets’.

Valuation

The promoter family has subscribed the entire pre-IPO capital at par value. The company does not have any great earned surplus to warrant a premium. Yet, it is asking for a share premium of Rs 4.80 cr!  Post-IPO, PFRL’s capital would increase to Rs 6.9 cr. Obviously the company’s present profitability is too insignificant to service the enlarged equity. An illustrious peer in the fitness industry, Talwalkars, despite having a net block of over Rs 400 cr, is discounted modestly 15 times its earnings.  Compared to Talwalkars’ P/E, PFRL’s valuation looks absurd.

HOW POWERHOUSE COMPARES WITH PEER
COMPANY NAME	Talwalkars	Powerhouse Fitness
Rs.Cr	MAR-14	PRE-IPO	POST-IPO
MARKET CAP	504.11	12.24	20.7
EQUITY	26.18	4.08	6.9
RESERVES	204.87	0.08	4.88
NET BLOCK	408.28	3.53	3.53
NET REVENUE	180.05	3.84	3.84
OPERATING PROFIT	80.63	0.49	0.49
NET PROFIT	33.4	0.08	0.08
PRICE-EARNINGS	15.1	153	258.8
PRICE/BOOK VALUE	2.2	2.9	1.8
PRICE/FACE VALUE	19.3	3	3
PRICE/REVENUE	2.8	3.2	5.4
PRICE/NETBLOCK	1.2	3.5	5.9
OPERATING MARGIN (%)	44.8	11.2	11.2
YIELD	0.8	0	0
SHARE PRICE (Rs)	192.55	30	30

Perception

Besides bizarre valuation, PFRL also carries the `baggage’ of perception-issues. There was a complaint lodged with SEBI alleging that Ashok Gupta and his connected-entities had acquired the control of SVC Resources during June-September 2006 without complying with the open offer requirements of SEBI Regulations. It was further alleged that Gupta’s family members acquired shares of Santowin Corporation and took over management control without complying with the open offer requirements of SEBI Regulations.  It was also alleged that pledged shares of SVC Resources and Santowin Corporation were done without complying with disclosure requirements.

SVC Resources and  its managing director have filed petition  before Company Law Board  against  Ashok  Gupta,  Akshat Gupta, Sushma Gupta and others seeking  that allotment of 1,08,44,426 equity shares  to Guptas and  allotment of 2,97,00,000 shares to Subhtex India  in May 2013 should be cancelled.  SVC Resources also received a letter alleging that open offer was not given for change of management, the directors had defaulted u/s. 274 (1)(g), correct annual report not submitted to BSE and to ROC amongst others. ROC has directed the Company to submit the point wise reply and documentary evidence wherever is necessary.

There was a complaint under Section 138 of the Negotiable Instruments Act by Prudent Fintrade against Akshat Gupta for cheque bouncing which was subsequently settled by the Court. SEBI notice dated June 02, 2014 alleged that Santowin Corporation provided wrong and misleading information to SEBI regarding the disclosure of acquisition of shares of Santowin by Akshat Gupta.

The name of one of PFRL’s promoters, Sushma Gupta, appears on the website ofwww.watchoutinvestors.com in relation to loan default by Subhakti Textiles in relation to loan taken from Central Ba nk of India. Sushma Gupta was one of the guarantors for the said loan. No wonder, though having been on the board of PFRL since incorporation as promoter, Sushma Gupta resigned from the board in August 2014.

Raj Dadarkar & Associates have filed suit against Powerhouse Fitness for eviction, injunction and recovery of arrears of compensation (Rent) of Rs 1,18,98,000 in terms of Leave and Licence Agreement and Business Service Agreement. The Court passed an interim order dated November 19, 2013, partially allowing the application, directing Powerhouse to deposit the arrears of compensation @ Rs. 1,50,000 p.m. from September 2011 to November 2013 and further deposit Rs. 1,50,000 p.m. till the decision of suit.

Issue Manager’s Track

The controversial promoters of PFRL have gone to First Overseas Capital (FOC) whose parentage itself was tainted in the 1990s securities scam. FOC is controlled by the Dalal family of CIFCO fame in yester years. Post-penalization of the security scam, this is the first time that the CIFCO group is handling a public issue. Indeed, FOC was associated with Fineotex Chemicals when it planned its IPO in 2008. But, the company subsequently dropped FOC and hired Indbank Merchant Banking for managing its public issue in February 2011.