Today we are going to do a brief coverage on – Pritika Auto Industries Ltd. (educational purpose article, not a recommendation to buy/sell), in FY17 it has acquired 100% shares of two companies by issuing its own share. This acquisition resulted into a reverse merger. A reverse merger takeover (reverse IPO) is the acquisition of a public company by a private company so that the private company can bypass the lengthy and complex process of going public.
Reason why one should invest in this company?
#1. The above listed company acquired two companies privately owned by same promoters namely Pritika Autocast Limited and Nibber Castings Private Limited by acquiring 100% equity shares of both the companies and thereby making them wholly owned subsidiaries and in return the company issued its equity shares to the shareholders of both the companies by way of preferential allotment. Promoter shareholding was 57.62% as on Sept 2017.
#2. Following table shows the balance sheet of the two subsidiaries in FY17.
Company has allocated 75,06,465 Equity Shares at a price of Rs. 37.4/- (share of company was trading at the same price at the time acquisition) to both the company together. It shows that company has paid Rs. 28.07 Cr. (37.4*75,06,465) to acquire both companies. Which mean that the company has acquired those two companies at a discount of Rs 9.33 Cr. Value of equity is theoretically the minimum amount which is needed to be paid in order to acquire that company. With this allocation, promoter will control approx 72-73% of the equity in combined entity.
#3. Following table shows the Profit or loss after tax of Pritika Auto Industries Ltd (Standalone), Pritika Auto Industries Ltd (Consolidated) and its Subsidiaries. It comes around 4.68 Cr PAT for H1 and considering same for the next half, we can assume that company will deliver PAT of around 9 Cr. On a diluted equity base of 2.10 Cr equity shares, EPS comes around 4.2 for FY17 and hence @ Rs 86/share price as on 20th Nov 2017, we are talking about PE of 20 which is reasonable and completely valued.
#4. Main source of revenue for the company is annual maintenance charge which it charges to the entity it provides services to. By acquiring these two companies, Pritika Auto Industries ltd. is backward integrating its operation. The subsidiaries are in business of manufacturing the equipment and the company can provide its services to buyers of these companies.Table above shows that subsidiaries of the company has generated Rs. 4.76 Cr of profit in two quarters or six months with a half yearly return of 17% on invested capital of 28.07 Cr.
Reason why one should avoid this company?
#1. While the consolidated statement shows that net sales has grown by 6.6% Quarter-on-Quarter (QoQ) in September quarter with net sales of Rs. 42.99 Cr, the standalone entity Pritika Auto Ltd. has shown no sales or revenue from operations in past two quarters. In past three-year company has not recorded any revenue from sales in December (fourth) quarter.
#2. To subsidiary Pritika Autocast ltd., Mahindra and Mahindra (M&M) buys more than 80% of its products, hence has higher bargaining power. Also the risk associated with having a single majority buyer is very high.
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