SRS: Avoid

Investors can refrain from subscribing to the initial public offering of SRS, a conglomerate with interests in businesses such as jewellery, retail cash-and-carry and food outlets. At the upper end of the price band (Rs 58-65), the offer asks for a PE multiple of 24 times its FY-11 earnings, on a fully diluted equity base. Even at the lower end, the multiple is a stiff 22 times. Jewellery sales currently account for over two-thirds of SRS' revenues. However, nearly half the IPO proceeds, of around Rs 227 crore, are to be spent on setting up cinema halls. The business now contributes less than two per cent of the group's overall revenues.

Low average ticket price and spends on foods and beverages, occupancies that are much lower than industry averages and lack of presence in any lucrative metro city are key negatives for SRS' foray into the cinema exhibition business. Even while evaluating its main jewellery business, accounting for 70 per cent of revenues, the offer is expensive, given that players such as Shree Ganesh Jewellery and Gitanjali Gems trade at low single-digit valuation multiples.

During FY11, revenues for the company grew by 56.2 per cent over the previous fiscal to Rs 2077.7 crore, while net profits expanded 43.6 per cent to Rs 37.5 crore.

Low-scale cinema operations

SRS operates 30 screens in the Tier-2 cities in UP, Haryana and Punjab. It has a total of 7,608 seats in these screens. This segment contributes just two per cent of revenues.

This is much lower than players such as PVR, which has as many as 146 screens and over 38,000 seats. It is not just the scale; the lack of presence in lucrative markets such as Mumbai, Delhi or Bangalore or other metros has meant much lower realisations.

And even at this scale, SRS has an occupancy level of just 20.4 per cent, which has been declining steadily, when larger multiplex screens and cinema halls have occupancy of 25-30 per cent. The presence in Tier-2 towns has meant that only a limited genre of films can be screened. The average ticket price, at Rs 119, is again much lower than the Rs 161 that a PVR or other operators command. The spending per head on food and beverages at Rs 31.6 is again lower than the Rs 50 levels or higher for larger players. Such a tight scenario and the rapid penetration of DTH, leading to newly released movies being broadcast at a fraction of ticket prices, means that there is an added challenge to players such as SRS.

Jewellery glitters

The jewellery business, the company's key sales and profit driver in recent years, sells finished jewellery through its retail outlets in New Delhi, Faridabad and Palwal. There are also a couple of wholesale outlets in New Delhi. SRS' gold business, which was nascent till 2009, has grown exponentially from Rs 15.7 crore to Rs 1458 crore in FY11, partly riding on the price rise. Margins on jewellery sales tend to be wafer thin, and SRS' sales to wholesalers and its presence in Tier-2 cities may make profit margins even more vulnerable to swings in costs and prices. Though Indian jewellery sales have been rising in recent years, the spike in gold prices to a new high can reduce volumes, especially in the mid and economy segments of the jewellery market.

Cash-and-carry competition

About 26 per cent of SRS' revenues come from its retail cash-and-carry business — SRS Value Bazaar (20 outlets) for FMCG products and SRS Fashion Wear (3 outlets) for top brands. Here again, barring Gurgoan, all outlets are in Tier-2 towns. Though value retail offers high potential for growth in the Indian market where unorganised retail dominates, not many players have been successful in scaling up from a regional presence to a national one, in recent years. The difficulties and cost pressures faced by value retailers such as Subhiksha, Vishal Retail and Koutons are testimony to the challenges of this business. Overall, in the light of the execution challenges facing SRS' rollout in each of its businesses, a wait-and-watch approach appears best for the stock.

SRS is offering 3.5 crore shares in the IPO. Karvy Investor Services and IDBI Capital Markets are the lead managers to the issue. The offer is open from August 23 to 26.

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