ARC Finance RI review (Avoid)

• The company is engaged in financial services and investment in security markets.
• It marked minuscule performance till FY24 and super profits for Q1 of FY25 appears to be the window dressing to match the asking price.
• Post-RI equity base of Rs. 90+ cr. indicates its servicing issues.
• There is no harm in skipping this "High Risk/Low Return" bet.

ABOUT COMPANY:
ARC Finance Ltd. (AFL) is a NBFC registered with the RBI to carry out NBFC activities under Section 45IA of the Reserve Bank of India Act, 1934 bearing Registration No. 05.01915 dated 30-04-1998. It operates as a Non Deposit taking Non-Banking Finance Company engaged primarily in the business of advancing loans and investing/trading in securities.

The objects clause of its Memorandum of Association enables the company to undertake existing activities and the activities for which funds are being raised by it through this Issue. The company advances loans involve providing funds to individuals or organizations, typically with the expectation of repayment over a specified period along with interest. This business focuses on assessing credit risk, setting interest rates, and managing repayment schedules to ensure profitability and minimize defaults.

Also the company focuses in investing and trading in securities involves buying and selling financial instruments like stocks, bonds, and derivatives. This aspect of the business aims to generate returns through capital gains, interest income, or dividends while managing market risks and optimizing portfolios. As of the date of filing this offer document, it had just 9 employees on its payroll.

ISSUE DETAILS:
The company is coming out with its Rights Issue (RI) of 403960000 equity shares of Re. 1 each at a fixed price of Rs. 1.20 per share to mobilize Rs. 48.48 cr. The RI opens for subscription on October 21, 2024, and will close on November 18, 2024. The company is offering RI in the ratio of 4 for 5 to its eligible stakeholders as of the record date of October 10, 2024.

The full amount is to be paid on application for number of shares applied. Post allotment, shares will be listed on BSE. The company is spending Rs. 0.27 cr. for this RI process, and from the net proceeds, it will utilize Rs. 16.49 cr. for repayment/prepayment of certain borrowings, Rs. 20.94 cr. for augmenting its capital base, and Rs. 10.78 cr. for general corporate purposes. There is a mismatch in total net proceeds figures on page 51 and page 52 of the offer document.

The issue is self-managed by the company itself., and Skyline Financial Services Pvt. Ltd. is the registrar to the issue. ABS Consultants Pvt. Ltd. is the registrar to the company.

Post-RI, company's current paid-up equity capital of Rs. 50.50 cr. will stand enhanced to Rs. 90.89 cr. Based on the RI pricing, the company is looking for a market cap of Rs. 109.07 cr.

FINANCIAL PERFORMANCE:
On the financial performance front, for the last two fiscals, it has posted a total income/net profit of Rs. 6.92 cr. / Rs. 0.33 cr. (FY23), Rs. 9.24 cr. / Rs. 0.27 cr. (FY24). For Q1 of FY25 ended on June 30, 2024, it earned a net profit of Rs. 3.06 cr. on a total income of Rs. 0.60 cr. This performance is really shocking and appears to be the window dressing ahead of RI to lure investors. The minuscule earnings on the current equity base of Rs. 50+ cr. indicates servicing issue on post-RI increased equity of Rs. 90+ cr.

DIVIDEND POLICY:
The offer document is silent on its dividend policy. It will adopt a prudent dividend policy based on its financial performance and future prospects.

SCRIP PERFORMANCE: BASED ON BSE WEBSITE DATA: SCRIP CODE: 540135 (FV Re. 1).
The scrip last closed on cum-right basis at Rs. 2.64 on October 09, 2024, and opened on an ex-right basis at Rs. 1.96 on October 10, 2024. Since then, it has marked high/low of Rs. 1.96 / Rs. 1.87. The scrip last closed at Rs. 1.96 as of October 18, 2024. For the last 52 weeks' it has posted a high/low of Rs. 2.32 / Rs. 0.51. The counter is currently under ESM: stage 2.

The promoters' holding has been constant at 12.02% for the last three quarters ended September 30, 2024. The counter is well managed above RI pricing to tempt investors.

Conclusion / Investment Strategy

The company is engaged in the financial services and investment in securities market. It posted minuscule financial performance, but the super profits for Q1 of FY25 ended on June 30, 2024 appears to be the window dressing for asking valuations. More than Rs. 90 cr. post RI equity base indicates its servicing related issues. There is no harm in skipping this “High Risk/Low Return” bet.

Reviewer recommends Avoid to the issue.

Review By Dilip Davda on October 18, 2024

Review Author

DISCLAIMER: No financial information whatsoever published anywhere here should be construed as an offer to buy or sell securities, or as advice to do so in any way whatsoever. All matter published here is purely for educational and information purposes only and under no circumstances should be used for making investment decisions. Readers must consult a qualified financial advisor before making any actual investment decisions, based on the information published here. My reviews do not cover GMP market and operators game plans. Any reader taking decisions based on any information published here does so entirely at their own risk. Investors should bear in mind that any investment in stock markets is subject to unpredictable market-related risks. The above information is based on RHP and other documents available as of date coupled with market perception. The author has no plans to invest in this offer.

About Dilip Davda

Dilip Davda is veteran journalist associated with stock market since 1978. He is contributing to print and electronic media on stock markets/insurance/finance since 1985.

Dilip Davda is a leading reviewer of public issues and NCDs in the primary stock market in India. The knowledge he gained over 3 decades while working in the stock market and a strong relationship with popular lead managers makes his reviews unique. His detail fundamental and financial analysis of companies coming up with IPO helps investors in the primary stock market. Dilip Davda has a special interest in analyzing the SME companies and writing reviews about their public issues. His reviews are regularly published online and in news papers.

(Dilip Davda -SEBI registered Research Analyst-Mumbai,

Registration no. INH000003127 (Perpetual)

Email id: dilip_davda@rediffmail.com ).

The ARC Finance Rights Issue 2024 Analysis helps you to understand about the company, offer detail, valuation, capital structure and financial performance. Our SEBI registered Rights Issue Analysts tells you if ARC Finance Rights Issue 2024 worth investing. The ARC Finance Rights Issue 2024 Note sets the Rights Issue expectations in systematic way which tells you if ARC Finance Rights Issue 2024 good to buy (good or bad / yes or no). The Rights Issue Forecast tells you weather to invest in ARC Finance Rights Issue 2024 by providing Rights Issue recommendations i.e. subscribe, avoid and neutral.