IPO Review: SRS LIMITED

 

SRS was incorporated in 2000, and operates in four business segments, namely, cinema exhibition, food & beverages, retail and jewellery. It aims to garner up to `227 crore from its public issue. Out of this, close to 50 per cent amount will be deployed to set up new cinema theatres in Tier-II and -III cities, while the rest will be used to expand its other three business segments.

CAPTURING RURAL DEMAND

The company is focusing on expanding its high margin businesses like cinema exhibition and food and beverages in Tier-II and -III cities, a step that will boost its profitability in the long run. It is also increasing focus on the corporate segment to provide banquet services. SRS is well poised to benefit from Indias rising consumption, as all its businesses directly cater to consumer demand. It stands to gain from the rising disposable income and high purchasing power of the rural and the semi-urban areas.

The company is a well-established brand in North India, which enables it to tap into new ventures as well as attract new talent. The company believes its unique strategy of opening at least two businesses in one mall will help it grow all its businesses. Further, its strategy of opening its own food courts in its cinema theatres, as well as sourcing of raw material for the food and beverages segment from its retail stores, will limit its dependence on third party vendors, apart from providing visibility to revenues growth. In jewellery, SRS manufactures and sells to retail and wholesale clients.

MACRO RISKS

SRS is primarily operating in the north Indian states at present, with some presence in central India. This exposes it to geographical risk and would also limit its ability to expand and compete effectively in other states. A majority of SRS revenues (71 per cent) come from the low-margin jewellery business, with the balance coming mostly from retail (25.5 per cent). Any slowdown in consumption due to factors like high interest rates, inflation, etc could impact the companys performance.

VALUATIONS, OUTLOOK

SRS revenues and net profit have grown at a compounded rate of 102 and 158 per cent, respectively, over the last three years. At the price band of `58-65, the post-issue P/E works out to 21.5-24.1 times, based on FY11 earnings. Assuming a net profit growth of 25 per cent for FY12, the P/E works out to 17.2-19.3 times. Given SRS revenue mix (currently tilted towards the low-margin jewellery business), the valuations look stiff. Its larger peers like Gitanjali Gems trade at a PE of 12.5 times FY12 estimated earnings, while PVR trades at 23.8 times, and prices in medium-term growth.