Sunstar Realty IPO Review by Naman Sec (Avoid)

Sunstar Realty Development Ltd. (Sunstar Realty) has come out with its IPO to raise Rs 10.6 crs for the purpose of financing its on-going project requirements and business plans. The issue, which opened yesterday, will close on the 21st February 2013. The company will list on the BSE SME exchange. The issue price has been fixed at Rs 20 per share with a minimum order quantity of 6000 shares, and in multiples thereafter. Sunstar Realty is primarily engaged in the business of development of commercial, residential and industrial projects. In this post, I elaborate my 'avoid' recommendation to the IPO.

Limited operating track record

Sunstar Realty, incorporated in 2008, commenced full fledged operations only three years later in 2011. Hence, the company has a limited operating track record. It has not completed a single project as on date, and thus, it is difficult to ascertain its project handling and execution capabilities. Real estate construction is a complex business and small, regional and recent entrants like Sunstar Realty will likely face immense competition to bag projects, execute them and scale up their operations. To substantiate, the company has 6 employees on its payroll handling the responsibilities of project manager, chief financial officer, sales and marketing manager, company secretary and accounts and marketing! Further, the promoters are also new to the company, they acquired the majority stake over a period from October 2011 to May 2012. Clearly, the company is in all means indicated by - new promoters, thin second line of management, handful of projects - in the very initial stages of its operations.

Ambiguous corporate history

The original promoters of the company, Mr. Sovan Dasgupta and Ms. Manjari Vijay Choudhary sold their stake to the current promoters, Mr. Dipen Patel, Mrs. Kavita Patel, together they hold 0.24% of the total share capital, and Heaven Petrochem Pvt. Ltd, which holds 30% of the total share capital. The reason for the stake sale, background of the original promoters and nil operating activity for the first three years since incorporation in 2008 are untouched upon in the Red Herring Prospectus (RHP). Mr. and Mrs. Patel are the only shareholders in Heaven Petrochem, a chemicals trading company. However, they are not the original shareholders, they acquired the majority stake in this company in March 2012. Sounds like a familiar transaction! Interestingly, while Mr.and Mrs. Patel acquired the shares of Sunstar Realty at the face value of Rs 10, Heaven Petrochem acquired the shares at Rs 20 per share or twice the face value. That too, for a company which had not commenced any major operating activity! Further, Heaven Petrochem, which is the majority shareholder of Sunstar Realty, has 'noteworthy' financials  - revenues of Rs 15,000, net profit of Rs 4000 and networth of Rs 86,000 in FY12! Further, Mrs Patel was a director of Sunstar Realty from 2010 to 2011, and then again became a director in 2012.

Other concerns

• The auditors of the company have changed twice in the last three years. The first one, Mahendra Doshi & Co. resigned due to pre-occupation in 2010; the following auditor Dipan Patel & associates, most likely a firm associated with the promoter Mr. Dipan Patel, resigned as auditors in 2011 due to conflict of interest. The current auditors are M/s S Rathi and Associates.
• The background of promoters is largely un-related to the core business of construction- one promoter is a chartered accountant, the other holds a bachelor degree in commerce and according to the RHP, has five years of experience in the fields of real estate and finance, and the third promoter is a chemical trading company.
• The independent directors are young and their ability to exercise the required oversight in governing the board remains to be seen.

Before going into the details of valuation, I would advice investors to avoid the IPO as its ambiguous history and future prospects do not inspire confidence. It is too risky an investment to bet a minimum of Rs 1,20,000 (6000 shares @Rs 20) on the issue!

The company reported revenues of Rs 1.9 crs in FY11, 0.3 crs in FY12 and 2.2 crs in the first half of the current fiscal. The big slump in revenues during FY12 was on account of lack of projects. The company currently has an order book size of Rs 21 crs, which is nearly 5 times its annualised revenues for FY13. However, its ability to translate the order book to revenues remains to be seen. The ROE of the company is negligible. Even if we annualise the net profits for FY13, the company is likely to report a weighted average EPS of Rs 0.27 per share, translating to a PE multiple of 75x! The fundamentals and valuations, both suggest the same - 'Avoid' the issue.