BD Paints, a relatively new entrant to the Bangladesh's paint landscape, plans to raise Tk 20 crore from the capital market in order to ramp up its production capacity -- even though about 60 per cent of its existing capacity remains unutilised.
The disclosure, which was pulled from the company's initial public offering prospectus submitted to the Bangladesh Securities and Exchange Commission in March 20 last year, raises questions about the necessity of the funds -- and the paint manufacturer's debut on the bourse.
In its IPO prospectus, which is available on the website of BD Paints, the decorative and industrial paint manufacturer said the industry is growing at 20 per cent, so the company will be able to make the most of the expanded production capacity.
Berger Paints, the market leader, though is not as buoyant as BD Paints: the Indian paint manufacturer in its annual report for the 2018-19 financial year said the sector grew at only 2 per cent.
After 7-8 per cent growth in the last few decades, in the 2018-19 financial year the paint industry had experienced abnormally low growth due to stagnation in the real estate market, said Berger Paints, the only listed paint company on Bangladesh's bourse.
Contacted, SM Mamun Ar Rashid, company secretary of BD Paints, said the 20 per cent growth figure was obtained from a research paper of LankaBangla.
But a top official of the LankaBangla Securities, who produces industry-wise research papers, said requesting anonymity that they have not disseminated any recent research paper on the paint industry.
"Once BD Paints makes its debut on the stock market, the company's profile will increase and so will the demand for its products," Rashid said.
With the proceeds from offloading 2 crore shares, BD Paints intends to expand its production capacity to 7,669.76 tonnes in the 2021-22 financial year.
When prodded how BD Paints will manage the trebling of output from its current level, Rashid said: "It takes time to create a brand image. We are now in a position to build up ours sales and our marketing team is also working accordingly."
BD Paints was established in 2014 as Arafat Paint & Chemical Industries. In September 2016 it was rechristened as BD Paints.
In the 2018-19 financial year, its sales dropped 6.8 per cent year-on-year to 2 billion tonnes, shows its financial statement, which was attached with the IPO prospectus.
Despite the drop in sales, the paint maker has shown its turnover rose in value by 7.4 per cent to Tk 36.45 crore -- thanks to a rise in price.
About the company's lower sales volume, Rashid said: "To grab a share of the market we sold in bulk in credit. As a result, our receivables soared."
In the 2018-19 financial year, the company's trade and receivables stood at Tk 13.96 crore, up 20.9 per cent year-on-year.
"To bring down the receivables, we are now scaling back our sales in credit. So, our sales were lower last year," Rashid added.
If the company augments its production capacity and its sales do not increase proportionally, then its earnings will be impacted negatively, said the research head of a leading asset management company preferring anonymity. "The company's sales volume fell last year, so why does it want to increase its production capacity?"
Abdul Mannan, a stock investor, is not surprised.
"Many companies come to the market and expand their production capacity. But, their sales don't increase, so their earnings per share dips. The sponsors wash off their hands from the company by offloading their stakes. Ultimately, the stock investors are the losers."
The company should have a concrete plan to utilise the funds in a profitable way, he added.
Some of the machineries of BD Paints are dated, so the company cannot churn out paint at the desired rate, said Tahid Ahmed Chowdhury, managing director of EBL Investments, one of the two issue managers of the IPO.
The other issue manager is CAPM Advisory. Imperial Capital had also signed up as an issue manager too originally, but dropped out later for conflict of interest.
"Besides, small companies can utilise up to 65 per cent capacity of their capacity normally. And their production capacity varies with customer demand."
When asked about the 20 per cent growth quoted in the prospectus, he said the company has provided the figure to them from LankaBangla and that the figure is of locally-owned paint companies. "So, their capacity utilisation should not be compared with the big companies'," Chowdhury added.
However, in the prospectus the distinction is not made.
Local companies have more opportunity to grab market share organically, said Tania Sharmin, managing director of CAPM Advisory.
"Since the market share of BD Paints is low, it will grow in future. We provided information furnished by the company and the auditor provided. So, ask them," she added.
FAMES & R Chartered Accountants audited BD Paints' financial statements.
Contacted, Md Abdur Rashid, a partner of the audit firm and who signed off on the financial statements, said: "Auditors audit only financial reports. I can't say anything about the company's production capacity and its assumption of the market growth rate."
A top official of BSEC said on condition of anonymity that if the company provides any misleading information in its prospectus the stock market regulator will take actions as per law.