Why investors should tread with caution in Paras Defence IPO

Why investors should tread with caution in Paras Defence IPO
September 21
10:56 2021

The primary market is booming as the recent success of a string of IPOs shows. Considering ample liquidity and low interest rates, the issuers of public issues are in a rush to make the most of it. And investors are rushing headlong into the party. Are they throwing caution to the wind? Amid all the euphoria in the air, could there be some blind spots along the way? As Paras Defence IPO opens today, we advise investors to pick and choose.

Paras Defence, incorporated in 2009 as Paras Flow Form Engineering, deals in optics, electronics and other engineering products. With the issue size at Rs 171 crore, the company has set the price band at Rs 165-175. The public offer is a mix of fresh issue and an offer-for-sale.

Before you make any move, just pick the cues below.

Points to note

– This player in the defence space is hitting the IPO market today to raise funds through a combination of fresh issue and an offer-for-sale.

– Defence engineering is a sound and exciting space to play, but there’s a catch with this public issue.

– Paras Defence is run mostly by family members and relatives of the founder, whose education and experience in this field provide very little comfort.

– Its promoters lack the bandwidth of strong track record when it comes to qualification and experience.

– The proceeds from today’s IPO include a substantial chunk of operating and issue expenses.

– Coming to its books, the amount of receivables and the loss provisions against it are quite high.

– A bulk of the issue, or Rs 60 crore, is marked for working capital, which is again very high, given the size of the balance sheet.

– As an equity shareholder, funding working capital and receivables is fraught with risks, especially when it’s a family-run business with promoters holding positions in several other privately held companies.

– The IPO document also highlights the observations of statuary auditors relating to income tax dues and delays in depositing the statuary dues.

– Any misallocation of capital will surely distort its shareholder value in the coming years.

–  Talking about valuation, it’s richly valued giving the sellers of the issue an advantage.

For a more detailed analysis, please read the Moneycontrol Pro article here.