SRS to enter into the capital market with an IPO of 3.5 crore equity shares

SRS Limited

• SRS Limited is coming out with a 100% book building; initial public offering (IPO) of 3.5 crore equity shares of Rs 10 each in a price band Rs 58-65 per equity share.
• Up to 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, 15% would be available for the non-institutional bidders and the remaining 35% for the retail investors.
• The issue will open for subscription on August 23, 2011 to and will close on August 26, 2011.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 10 and is priced 5.8 times of its face value on the lower side and 6.5 times on the higher side.
• Book running lead managers to the issue are Karvy Investor Services, IDBI Capital Market Services and SPA Merchant Bankers.
• Compliance Officer for the issue is Mamta Rastogi.

Profile of the company

SRS is a diversified company with a business portfolio comprising of Cinema Exhibition, Food & Beverages, Retail and Manufacturing and Retailing of Jewellery. The company was incorporated on August 29, 2000 with the objective of trading in FMCG Goods and it later entered into other business segments. The major four business verticals of the company enable it to profitably exploit the business synergies, as well as smoothen out seasonal business fluctuations. The four business verticals of the Company area Cinema Exhibition, Food & Beverages Retail and Manufacturing and Retailing of Jewellery.

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 7,608 seats. It is a brand that is fast spreading its footprint across the major cities of North India. SRS brand is a well recognized film exhibition brand in North India.

In the food & beverages segment, the company operates a chain of food courts, fine dining restaurants and banquets across several cities. The food courts are run under the SRS 7dayz brand and currently, the company operates 11 food courts across North and Central India. The fine dining restaurants are operated under the brand Punjabi Haandi and 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.

The company operates a chain of retail stores under the brand name of SRS Value Bazaar that offer FMCG products including food and groceries, apparels, cosmetics / home care /personal care products, crockery, appliances, accessories, etc. SRS Fashion Wear is the other brand under which the company retails multi-brand apparels. The company has 23 retail stores in North India with a total floor space of more that 0.132 mn. sq. ft. Apart from this, the company is also active player in the cash & carry business.

In its jewellery business the company procures jewellery from its 100% subsidiary having manufacturing facility at Patparganj, New Delhi and through third parties. In this division, the company is into whole-selling and retailing of jewellery. It sells a wide range of gold and diamond jewellery under the brand name of SRS Jewells. The product portfolio includes gold coins, necklaces, rings, pendants, bracelets, earrings, bangles etc.

IPO Grading

ICRA has assigned IPO grade of ‘3/5’, indicating average fundamentals to the Initial Public Offering of the company.

Proceeds is being used

• Setting up of cinemas
• Setting up of food courts and restaurants
• Setting up of retail stores
• Setting up of jewellery manufacturing facility and jewellery retail stores
• General Corporate Purposes and issue related expenses

Industry Overview

Film Industry: Indian film industry is projected to grow at a Compounded Annual Growth Rate (CAGR) of 9% and reach $3 billion by 2014. Growth drivers for the sector would include expansion of multiplex screens resulting in better realizations, an increase in the number of digital screens facilitating wider releases, higher cable and satellite revenues, improving collections from the overseas markets and ancillary revenue streams like Direct To Home, digital downloads, etc., which are expected to emerge in future. Growth drivers for the film entertainment sector would include expansion of multiplex screens resulting in better realizations, increase in number of digital screens facilitating wider releases, higher Cable and Satellite revenues, improving collections from the overseas markets and ancillary revenue streams like DTH, digital downloads etc., which are expected to emerge in future.

Food & Beverages Business: The Indian foods industry has grown significantly on the back of increasing expenditure on food items over the years. The mix of food items has changed with an increased spending on fruits and vegetables, beverages and processed foods. Industry sources forecast the Indian foods industry to reach $300-350 billion by 2015 from an estimated $150-200 billion (in 2006-07). The food service industry segment refers to the sale of foods and beverages for immediate consumption from designated eating joints or areas. This can be further divided into organized and unorganized sub segments each with distinct business dynamics. The food service industry growth is also closely linked with the growth of retail destinations - malls in India. This is expected to expand the share of the organized foods segment (currently about 10%) in the total industry.

Retail and Cash & Carry: The Indian retail industry is the fifth largest in the world. Comprising of organized and unorganized sectors, India retail industry is one of the fastest growing industries in India, especially over the last few years. Though initially, the retail industry in India was mostly unorganized, however with the change of tastes and preferences of the consumers, the industry is getting more popular these days and getting organized as well. With growing market demand, the industry is expected to grow at a pace of 25-30% annually. By 2012 the rural retail market is projected to have a total of more than 50 % market share. The total number of shopping malls is expected to expand at a compound annual growth rate of over 18.9% by 2015. Moreover, cash and carry units are wholesale formats operating on a trading space spread across 85,000-1, 25,000 sq ft. Their chief target audience are retailers (mom and pop stores), but also include hotels, restaurants, caterers and institutions. These wholesalers stock a wide array of brands and private labels across verticals like food and grocery, apparel, household appliances, household items etc. SRS has ventured into the wholesale cash and carry format and intends to expand its presence in the domain in the long term.

Jewellery: The gems and jewellery market is one of the leading contributors to India’s export revenues. The Indian jewellery retail market was estimated to be about $14.6 billion in 2009-10. Of this, the urban jewellery market is valued at $5.8 billion and the rural and semi-rural market is valued at $8.8 billion. Gold and diamond jewellery are the two major segments in the Indian gems and jewellery market. While gold jewellery accounts for around 80 per cent of the Indian jewellery market, the balance comprises of fabricated studded jewellery (including diamond jewellery). A sizeable quantity of gold jewellery manufactured in India is consumed in the domestic market. In diamonds, however, a major portion of rough, uncut diamonds processed in India is exported, either in the form of polished diamonds or finished diamond jewellery. Besides being the largest consumer of gold in the world, India also leads in diamond cutting.

Pros and strengths

Strategic selection of location: The company has the ability to identify locations with potential for growth for its business particularly in Tier II and Tier III cities. One of the important factors of continued growth has been the ability to open and operate business at such locations. This has helped the company in gaining the benefits of first mover’s advantage. The company ensures that it conducts a financial and operational analysis of any proposed (new) location and the company has been fairly successful in this strategy. The company has an efficient selection process that takes into consideration various factors such as location visibility, presence of competition, household count etc. It also conducts a return-on-investment analysis based on projected sales and profitability to determine the financial feasibility at such location.

Better negotiation ability with mall developers: The company has better negotiation ability with mall developers because of their presence in various verticals of business. The combination of the related business segment like cinema exhibition, food & beverages, retail are capable of generating higher number of customer footfalls. The company’s presence in shopping mall helps the developer to market mall space to other retailers also. The company’s hybrid model also gives a higher negotiating power in terms of lease rent with shopping mall developers.

Cross Promotional Support: The company is constantly getting cross promotional support between the various business sectors, cinema exhibition, food & beverages and retail. The schemes and offers are advertised across all the locations of other segments. Not only does this save promotional expenses, but it also strengthens the brand image. The company 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. Presence in different segments also helps in a better brand recall. The company also runs schemes whereby the customers are given the opportunity to derive benefits for purchases made in one segment with another segment.

Economies of Scale in bulk purchase: The company procures items in bulk for the retail and food & beverage segments. The retail segment comprises of cash & carry and wholesale and retail sale through its various stores, “SRS Value Bazaar” and food & beverages segment comprises of food courts, fine dining restaurants, banquet services and packaged snack food segment which use these groceries as their raw material to prepare food items. The company places consolidated order for procurement of items which helps them in competitive prices for items used in the retail segment and food & beverage segment and hence, results in increase in margins.

Risks and concerns

Dependent on supply chain management: The company strives to keep optimum inventory at its stores and distribution centre to control its working capital requirements. Ensuring shelf availability for its products warrants quick turnaround time and high level of coordination with suppliers. Food and grocery items require efficient supply chain management as this involves items which are perishable or have limited shelf life. Inefficient supply chain management may lead to unavailability of merchandise. The company relies on its supply chain and adopts operational processes to optimize its inventory position and reduce cost. The company strives to keep optimum inventory at its stores and distribution centers to control its working capital requirements. For instance, on back of its supply chain management, the company does not provide for dedicated storage spaces in most of its stores. In addition, the company does not have any long-term arrangements with its suppliers and vendors. Inefficient supply chain management could adversely affect the operations and profitability of the company.

All the stores are located in Northern India: Part of the company’s growth strategy has been to expand its business into new geography. The company proposes to continue with this strategy of entering new geographic areas. The company may face additional risks if it undertakes projects in geographic areas in which it does not possess the same level of familiarity with the development, ownership and management of retail business and the customer preferences. In the event the company is unable to successfully manage the risks of such an expansion, it could have a material adverse effect on its financial position.

No control over distributors of the films: The company relies on distributors of motion pictures. Major motion picture distributors normally offer and license films to exhibitors, including the company, on a film-by-film and Cinema-by-Cinema basis. Consequently, the company cannot assure itself for a supply of motion pictures by entering into long-term arrangements with major distributors, but must compete for its licenses on a film-by-film and Cinema-by-Cinema basis. Further, the risk of formation of a cartel amongst the distributors or in a scenario of a strike may make the procurement of films from distributors difficult or unduly expensive and thereby affecting its business and financial performance adversely.

Dependent on adequate and timely delivery of quality ingredients: The operations of the company are dependent on adequate and timely deliveries of quality ingredients, including fresh produce. The company depends substantially on suppliers for such deliveries and vendors may be unable to provide the company with a sufficient quantity of quality ingredients for it to meet customer demand for its products. If the quality of suppliers’ ingredients declines, the company may not be able to obtain replacement for quality ingredients on commercially agreeable terms in the open market. If, food quality of the company declines due to the inferior quality of ingredients or due to interruptions in the flow of ingredients and similar factors, customer base may decline and negatively affect its results. In addition, the company does not have exclusive supply arrangements with its suppliers and these suppliers may choose to work with the competitors. In the event of a major disruption to the timely supply of quality ingredients, alternative suppliers of food and / or distribution services (as the case may be) may only be available at higher prices.

Peer Group Comparison (Rs. in Millions)

Outlook

SRS is a diversified company having businesses like cinema exhibition, food and beverages, retail and manufacturing and retailing of jewellery. The company operates 23 SRS Value Bazaar retail stores, 15 food courts and 30 cinema screens in North India. It also operates five jewellery retail and wholesale outlets and a jewellery manufacturing unit in Delhi. The company has strong distribution and logistics network which comprises two warehouses located at Faridabad and Gurgaon, in Haryana, which act as the focal point of contact between the vendor and distribution centres. Besides this, the company has its own fleet of 14 vehicles, which helps it to transport and deliver products in a cost and time efficient manner. Also the company is having a Strong and Efficient Supply Chain Management which provides it flexibility to adapt to changing patterns in consumer behaviour and the ability to add value at various levels.

On the concern side, the revenue of the company’s Cinema business is seasonal and its results of operations may fluctuate from quarter-to-quarter. The company also has limited operating and financial history in undertaking jewellery business and the ability to operate its existing and new stores successfully is subject to various contingencies, many of which are beyond its control. Moreover, the company operates in a competitive business environment. Competition from existing players and new entrants and consequent pricing pressures may adversely affect its business, financial condition and operations. In cinema exhibition segment, the company faces competition from alternative entertainment channels including, television, film DVDs, radio, internet and theatre, hand-held equipments etc. Also, in the cash & carry business, the Company buys and stocks goods in bulk and further sells to the retailers on a sales or returns basis. In the event of any unsold perishable products or any sales return, the company’s profitability will be adversely affected. Further, the goods are sold on credit basis to the retailers and the company is under obligation to accept the returned goods from the retailers, even if the goods are expired. In such events, the financial performance of the company could be adversely affected.

The company is entering the capital market with an IPO of 3.5 crore equity shares by diluting 25.13% stake. Promoters’ stake will be reduced to 74.04% from the current holding of 98.89% post issue. The issue has been offered in a price band of Rs 58-65 per equity share. Based on the EPS of Rs 3.59 for the fiscal years ending March 31, 2010 the P/E comes at 16.16x at the lower price band while, it comes at 18.11x at the upper price band. The company has reported a rise of more than 56% in its total income for FY11 to Rs 2,077.71 crore as compared to previous financial year. Net profit in the same period jumped 43.4% to Rs 37.51 crore. The company is well placed in the diversified sectors, however, this diversification sometimes also limit the growth of the company. The Company now aims to target the corporate segment in a dedicated manner to increase its revenues and now proposes to provide banqueting services for corporate meets, annual days, corporate events, conferences, etc., apart from increasing its thrust for corporate gifts during the festive season. The company has shown strong revenue and profitability growth and is having healthy cash accruals it also holds a well established brand of "SRS". However the scale of operation is limited and expected to expand after the issue with the issue proceed, also its jewellery business that has performed well in recent time is vulnerable and is exposed to fluctuations in price.  Though the performance of the company has been satisfactory but the deployment of the IPO fund are expected to be deployed in the businesses that have weak profitability. Out view will be neutral for the issue with no clear picture of the growth prospect due to its diversified nature of business.