SRS IPO Analysis

SRS, promoted by Dr. Anil Jindal, Sunil Jindal, Bishan Bansal, Raju Bansal, BTL Industries. and BTL Portfolio is a diversified company with a business portfolio comprising of cinema exhibition, food & beverages, retail and manufacturing & retailing of jewelry.

Cinema Exhibition

SRS Cinemas is the cinema exhibition brand under which the company operates a chain of cinemas spread across six cities. This includes 11 properties at strategic locations having 30 screens
and 7608 seats in three states.



The film exhibition business/cinema earns revenue from three main sources: box office collection, food & beverages (concessions), and advertisement, among others. Nearly 72% of the revenues are generated from the box office collection, food and beverages contributes 19% of the revenues in cinema division while balance is from other sources like advertisement.. Presently, it has been granted exemption from payment of 100% entertainment tax for four cinema properties and 75% entertainment tax for one cinema property.

For FY 2011, the revenue from the cinema business grew by 69% to Rs 36.88 crore (contributes 2% of total revenue) and had EBIDTA margin of 17.9%. EBIDTA stood at Rs 6.61 crore, growth of 104%.

Food & Beverages

The food & beverages segment operates chain of food-courts, fine dining restaurants and banquets across several cities. The food-courts are run under the "SRS 7dayz" brand. Currently, the company operates 11 food courts across north and central India. The SRS 7dayz brand also sells packaged snack food such as namkeens, cookies and bakery products through its own retail stores as well as through other retailers.

The fine dining restaurants are operated under the brand "Punjabi Haandi". Currently the company operates three Fine Dining Restaurants that are located at Faridabad, Gorakhpur and Ludhiana. All these outlets are strategically located at high footfalls areas such as malls and high street markets to ensure higher visibility and walk-ins. Apart from this, it offers indoor and outdoor catering services through its brand "SRS Banquets", which is located at Faridabad.

For FY 2011, the revenue from food & beverage business grew by 25% to Rs 21.25 crore (contributes 1% of total revenue) and had EBIDTA margin of 16.4%. EBIDTA stood at Rs 3.48 crore, growth of 63%.

Retail and Cash & Carry

The company operates a chain of retail stores under the brand name , "SRS Value Bazaar", offering FMCG products including food and groceries, apparels, cosmetics / home care / personal care products, crockery, appliances, and accessories. "SRS Fashion Wear" is the other brand under which it retails multi-brand apparels. It has 23 retail stores in North India with a total floor space of more that 0.132 million sq ft. Out of these 23 stores, only one is owned by the company while rest 22 are on lease. Apart from this, it is also an active player in the cash & carry business.

For FY 2011, the revenue from cash & carry business grew by 17% to Rs 521.25 crore (contributes 26% of total revenue) and had EBIDTA margin of 2%. EBIDTA stood at Rs 10.36 crore, growth of 11%.

Manufacturing & Retailing of Jewelry

The company is also into wholeselling and retailing of jewelry. It sells a wide range of gold and diamond jewelry under the brand name, "SRS Jewells". The product portfolio includes gold coins, necklaces, rings, pendants, bracelets, earrings, bangles etc. The company has three retail showrooms at Delhi, Faridabad and Palwal and two wholesale outlets at Chandni Chowk and Karol Bagh, Delhi

It procures jewelry from its 100% subsidiary with manufacturing facility at Patparganj, New Delhi, and through third parties. Capacity of this plant is 4.5 TPA. Recently, it also started manufacturing facility at Noida SEZ; FY 2012 year-end capacity is expected to be 25 kg.

For FY 2011, revenue from the jewelry business grew by 78% to Rs 1458.16 crore (contributes 72% of total revenue) and had EBIDTA margin of 5.9%. EBIDTA stood at Rs 86.09 crore, growth of 30%.

The company has developed a mall, "SRS Mall" at City Centre, in Faridabad, in 2004. It is located in the heart of Faridabad, built over an area of 2,136.86 sq. mt. purchased from HUDA with ample parking space. The total built-up area is approximately 138,000 sq. ft. A total of 47 outlets operate in the mall out of which 15 are used by the various business divisions of SRS.

The company intends to enter the capital market to raise money in the range of Rs 203 crore to Rs 227.5 crore by issuing around 3.5 crore equity share of face value of Rs 10 each at the price range of Rs 58 to Rs 65 per share. The proceeds will be used for:

A) Rs 101 crore will be used to set up new cinemas in 15 locations across India with 51 screens and approximately 13,840 seating capacity. Out of these, it proposes to set up cinemas at four locations with 15 screens with 4,090 seating capacity in FY12 and the balance 11 locations with 36 screens with 9,750 seating capacity in FY 2013. Out of the total 51 screens it plans to open three screens in Tier I cities, 26 screens in Tier II cities and 22 screens in Tier III cities. The company intends to use Rs 101.18 crore for it from IPO proceeds.

B) To set up 33 additional food & beverages outlets with an estimated area of 181,500 sq. ft. The company intends to use Rs 39.95 crore for it from IPO proceeds.

C) The company intends to utilize Rs 53.69 crore of the proceeds from this Issue to set up 29 new retail stores in various locations across India with total estimated area of 290,000 sq. ft. Out of this, it proposes to set up 9 retail stores with an approximate area of 10,000 sq. ft. each in FY 2012 and 20 stores with an approximate area of 10,000 sq. ft. each in FY 2013.

D) The company intends to utilize Rs 16.70 crore for setting up jewelry manufacturing facility and jewellery retail stores. It proposes to explore newer geographies especially in Tier II and III cities to make a mark in the business of organized retailing of jewelry.

Strengths

The CAGR of Income from operations over the last 3 years, from the cinema division stood at 39%, from the F&B division at 70% and from the retail and cash & carry division at 59%.

There is constant crosspromotional support between the cinema exhibition, food & beverages and retail businesses of the company. The schemes and offers are advertised across all the locations of other divisions. Not only does this save promotional expenses, but it also strengthens the brand image. It also organizes mall activities such as campaigns and fairs for collective branding. The presence of different businesses in a single location complements the businesses for each of the segments. It also runs schemes whereby the customers are given the opportunity to derive benefits for purchases made in one segment with another segment

The company has better negotiation ability with mall developers because of its presence in related business segments like cinema exhibition, food & beverage, retail, which are capable of generating higher number of customer footfalls. The presence of the company's businesses in shopping mall helps the developer to market mall space to other retailers.

By virtue of being in multiple segments, it is relatively insulated against seasonality, as each segment is active at different points throughout the year. Though, each segment gets affected by seasonal fluctuation, diversity in business provides regular cash flows throughout the year.

Weaknesses

The company faces competition from other cinema houses, food & beverages outlets, retailers and jewelry manufacturers. These include stand-alone outlets in the organized and unorganized sector, as well as other chains of outlets.

It has negative cash flow from operating activities of Rs 24.07 crore in FY2009, Rs 95.59 crore in FY2010 and Rs 47.18 crore in FY2011.

Some of the promoter group companies have objects similar to that of the company and are conflicting in nature. Out of the promoter group companies, eight companies have main objects which conflict with the present business activities of the company

The cinema exhibition business is seasonal and its results of operations may fluctuate from quarter-to-quarter. Also the business is dependent on the popularity of the films it exhibits.

In retail, certain products like apparels may go out of style/fashion on account of changing customer preferences. This may lead to dead stock or increased cost of carrying that stock and as well as witnessing a downgrade in the realizable value of the same.

In the cash & carry business, the wholesale goods purchased by it are subject to commodity price fluctuations. Any significant negative variation in such prices will adversely impact the results of operation.

In the jewelry business, gold typically constitute major component of raw material cost and any adverse price fluctuations in gold would substantially increase cost of materials and adversely affect profit margin. Further, if there is a significant upward variation in the prices of gold, the consumers may hold back / reduce their purchases. This may adversely affect results of operation.

Valuation

The consolidated net sales for FY 2011 has increased by 56% to Rs 2040.97 crore, with the operating profit margin of 4.5% and net profit of Rs 37.51 crore, which was up by 43%.

At a price band of Rs 58 to Rs 65 per equity share of Rs 10 face value, the P/E at the lower band works out to 21.5 times and at the upper band it works out to be 24.1 times on the EPS of Rs 2.7 for FY11 (on post-IPO equity). The company earned about 72% of its sales and 81% of EBIDTA in FY 2011 from jewelry business, which trades at P/E of 9 times TTM earnings. The largest part of the funds raised through the present issue will be used for cinemas business wherein the largest player (PVR) trades at 19 times its FY 2011 earnings.

via CM