Disclaimer: This is not a recommendation to subscribe/reject. It is an educational exercise to detect potential issues and possible misappropriation of funds.
1) Indirect Promoter remuneration
Promoters get paid 1.9 cr as sitting fees via the subsidiary. That's almost 3% of the firm profit for the fiscal. Note that this isn't the director sitting fee on the main firm which has been kept low at 87 lakhs for all 7 directors combined.
2) Loss Making Group companies
The promoters also have ownership in four loss making hotel businesses, which had a loss in excess of 19cr in FY19. This is an issue on multiple counts. For one it could reduce promoter focus from running the main business to watching over these completely unrelated businesses.
Second, continued and growing financial stress in these companies could put the promoter's financial health at risk, which could lead to pledging of Route shares. Third and most important, there could be a possibility of transfer of funds from Route to these companies.
While the first two are either subjective or will need to be tested at a later date, the first can be tested now. So let's look at the related party transactions
3) Related party transactions
For a firm with 22 subsidiaries and 4 loss making group companies and a major promoter owned proprietorship firm, related party transactions are always an area to watch out for.
These are the purchases made by Route from a proprietorship firm owned by the promoters. Notice both the spike in purchases until FY20 and the sharp drop in purchases in the IPO quarter.
For reference, the purchases from this entity owned by promoters was 2.9%, 18.1%, 15.2% and 0.4% of total purchases for the firm. If you're wondering why the number was low in FY18, the firm also tried to IPO earlier, around FY18. Make of that what you may.
29 Three holidays is a group company owned by the promoters - and is incidentally the only profitable firm in the mix. Although it should write a note of thanks to the promoters who spend close to 2cr there every year. That's another 3% of bottom line. The firm spend 5.2, 3.0 and 3.1cr on traveling and conveyance over the last three fiscals, which meant an overwhelming majority of the firms travel and conveyance spend went to a group company owned by promoters.
Despite this the firm has received strong interest in the anchor rounds from some of the most marquee Indian investors and almost every review for the firm from sell-side has been a Subscribe. More importantly none of the sell side players even mentioned any of these factors as potential risks. While this is not a recommendation to subscribe/stay out, we thought you should be aware of some of these issues before taking a call.
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