Max Alert IPO: Investor may have to wait for decent returns :VS Fernando, IPO Analyst at India Aarthik Research

Max Alert Systems :

SEBI requires maximum alert to prevent 'market-makers' turning into manipulators!

OFFER AT A GLANCE
Name	Max Alert Systems Ltd
Offer Quantity	34 lakh shares of Rs 10 each
% on Total Equity	37%
Offer Price	Rs 20
Offer Amount	Rs 6.8 cr
Application Quantity	6000 & Multiples of 6000
Offer Opens	June 28, 2012
Bid/Offer Closes	July 2, 2012
Rating	Nil
Listing	SME Platform of BSE
Lead Managers	Comfort Securities
Registrars	Sharepro Services

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Issue Details

The 2004-incorporated Max Alert Systems Ltd (MASL) proposes to offer public 40 lakh equity shares of Rs 10 each at a fixed price of Rs 20 a piece aggregating to Rs 8 crore of which 6 lakh shares are reserved for the market maker.

The shares are proposed to be listed on the SME Platform of Bombay Stock Exchange (BSE). Minimum subscription for the retail applicant is 6000 shares or Rs 1.2 lakh. The entire issue has been under-written by the lead manager, Comfort Securities.

Issue Object

The object of the issue is setting up of a stone crushing plant at a cost of Rs 8.6 crore besides facilitating the listing of the shares. However, the fund requirement and deployment have not been appraised by any bank or financial institution.

Issue Grade

The IPO being made under 'Chapter XB of the SEBI (ICDR) Regulations', there is no requirement of IPO grading.

Promoter

The Mumbai-registered MASL has been promoted by Kerala-based Anilkumar Chandra (40) and his brother Lenin Chandran (38), who have diploma in Electronics Engineering. Currently they hold 99.5% of the pre-issue equity of Rs 5.20 crore which amounts to 56.5% post-IPO.

The promoters, who claim to have experience in fire fighting, buildings management systems (BMS), telecom and infrastructure activities for over 7 years, have 9 companies under their fold of which only three have a credible record to speak about. Being an ex-employee of BPL Telecom, Anilkumar initially concentrated on telecom tower related activities and subsequently diversified into fire protection. Recently the group has entered into stone crushing and road construction activities.

Interestingly, the group flagship, Delta Infra Ltd, which is a competitor to MASL in telecom tower erection and stone crushing, too has plans to go public sooner than later.

Track Record

Initially engaged in providing solutions for fire fighting services, BMS and other allied activities, MASL subsequently diversified into the business of telecom industry i.e. installation of mobile towers. However, of late, telecom related activities have been pruned down.

As regards financial performance, MASL has registered an impressive growth in last four years. From just Rs 3.88 crore in 2007, the company’s revenue has progressively increased to over Rs 33 crore in 2011. Net profit has leapt from Rs 13 lakh to Rs 171 lakh during this period. Nevertheless, post-bonus issue, the eight year-old company’s reserves amount to less than Rs 2 crore.  

Prospects

Even though MASL has achieved an impressive growth on the revenue front in recent years, its operating margin (10%) is nothing to boast about. For the last audited full year, the company’s bottom line amounted to Rs 1.73 crore which yields an EPS of about Rs 1.90 on the post-IPO equity of Rs 9.2 crore. Will the premium issue fetch any dividend in the first year? If the company’s short term fund requirements (Rs 6.5 crore) to retire its loans are any indication, investors may have to wait for a while to get a decent return. In fact, what one should worry about is the company’s unwarranted diversification into stone crushing activity.

MASL’s group company Delta Infra Ltd is said to have recently entered into stone crushing in the state of Jharkhand. For Delta, which is into infra-construction activity, crushing could be a natural diversification. MASL’s proposal to set up a crusher in Jharkhand thus raises serious doubts about the promoters’ intention.  

Valuation

While there is no comparable peer in the market to gauge the pricing, MASL’s IPO price looks reasonable against its historical earnings though the unrelated diversifications and conflict of business interests within the group companies make the IPO unworthy for investment.

How Max Alert System compares with others
DESCRIPTION	M-CAP	P/E	P/BV	P/FV	P/R	OPM	YLD	PRICE
(26-JUN-2012)	(Rs Cr)	(x)	(x)	(x)	(x)	(%)	(%)	(Rs)
Nitin Fire Protect	1,051	87.1	7.6	23.8	6.4	15.0	2.1	47.65
Zicom Electronic Sec	55	10.4	0.4	4.3	0.2	10.8	2.3	43.00
Market Composite	5,959,423	14.5	2.1	28.2	1.2	22.3
Max AlertSystems	18	8.1	1.2	2.0	0.4	10.1	0	20.00

(Source: India Aarthik Research)

Manager’s Track

The lead manager of MASL IPO, Comfort Securities, has fully underwritten the issue which will make the IPO sail through. But, will the lead manager be able provide enough comfort to the investors as a market maker without any manipulation? The previous two IPOs handled by the same investment bankers are today languishing at less than one-fifth of their offer prices!

COMFORT SECURITIES-ASSOCIATED IPOS
Issuer	IPO	IPO	Listing	Current
	Date	Price	Gain%	Gain%
Tarapur Transformers	26-Apr-10	75.00	-24.1	-82.4
Ravi Kumar Distilleries	8-Dec-10	64.00	25.1	-84.6

Concerns

- Promoters new to investors; profitability far from impressive; non-dividend paying company
-Unrelated and unconvincing diversification
-Conflict of business interest within group companies  
-A majority of group companies are into losses
-Negative net cash flow from MASL’s operations in four out of last five years
-For a part-use of the `Registered Office’ the public company pays a hefty rent to a group company which itself has sub-let the office belonged to a third party -IPO is meant for funding crusher project whose land is yet to be identified 
-Reserves not even Rs 2 crore yet, asking for a premium of Rs 4 crore
-Promoters’ cost of holding is just 52 paise as compared to the IPO price of Rs 20 
-Pathetic post-list performance of the IPOs handled by the investment banker