Refex Refrigerants Limited: IPO

AVOID


Refex Refrigerants Limited( Refex) is in the business of refilling and marketing non-ozone depleting refrigerant gases popularly known as ‘HydrofluroCarbons’ or HFCs which are used in auto airconditioners, room air conditioners, refrigerators and refrigerating equipments. A mandatory shift from CFC to HFC will throw open opportunity for the players like Refex.

Financials

Revenue CAGR: 283% over three years
Profit CAGR: 758% over three years
OPM: From 21% to 12.91% over three years.

Objectives

Part finance the project of expansion of the present installed capacity of cylinders from 480 MT per annum to 3,000 MT per annum using Rs 29.09 crore. Rs 3.50 crore meant for meeting the margin money requirement for working capital and expenses towards brand building. The project is expected to come on stream by December 2007.

Outlook

The stock on offer is available at 25 times its twelve months trailing EPS of Rs 2.57 on the fully diluted equity capital. On its face this valuation appears stretched. Though there is a six-fold growth in the installed capacity The risks are much higher than the rewards and enumerated below:

Commodity nature of business.
No entry barriers.
Project execution risks, especially one where the project is already delayed.
Bankers have not only restricted the company but also the promoter group companies, indicating high risks.
Ability to get business without compromising on the margins.
Doubtful promoters: The company as of now employs only 32 employees and spends just 44 lacs of rupees on them. The details of the employees and their remuneration are further a grey area. The company’s CS- a qualified FCS and a man of more than 35 years of experience- is paid a paltry sum of Rs 1.8 lacs per annum. The accounts head is paid Rs 1.08 lacs per annum. This lady is a commerce graduate with 15 years of experience. The factor head-woks manager draws similar salary and has completed his H.S.C.
Trading income is far more than the income shown under manufacturing activity.
Though the growth rate in the trading income is higher than the growth in manufacturing income the net profits has grown much faster improving NPM when the operating margins are continuously falling.
Business itself is a low-end activity in the value chain.

To sum up keep the involvement of BCCL aside and forget multi-fold growth, and avoid this IPO as there are better places to park your money.