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Scarnose Intl BSE SME IPO review (Avoid)
• SIL primarily engaged in trading activities of agro commodities and cotton.
• Off late it has ventured into manufacturing of ladies Kurti and dress materials.
• It is operating in highly competitive and fragmented segments.
• Though the top and bottom lines have shown improvements, it is falling short of the asking price.
• There is no harm in ignoring this greedily priced offer.
Scarnose International Ltd. (SIL) was established in the year 2011 as a Private Limited Company with the basic object of Trading agriculture commodities. Till March 2019, there was no major business activity in the company. From the financial year 2016-2017, the Company started trading activities on a small scale. It started its major business operation effectively from the financial year 2019-20. Currently, besides agricultural commodities, SIL is also in the trading activities of raw cotton/cotton bales.
From the last fiscal, SIL has ventured into manufacturing Ladies Kurtis and Dress Materials on the outsource models. It is selling its products under the brand name “Scarnose”. As of April 30, 2022, it had 9 employees on its payroll. It also gives jobs on a contract basis.
ISSUE DETAILS/CAPITAL HISTORY:
To part finance its needs for working capital (Rs. 2.51 cr.), repayment of the unsecured loan (Rs. 2.89 cr.) and general corporate purposes (Rs. 0.65 cr.), SIL is coming out with a maiden IPO of 1200000 equity shares of Rs. 10 each at a fixed price of Rs. 55 per share to mobilize Rs. 6.60 cr. The issue opens for subscription on June 14, 2022, and will close on June 17, 2022. Minimum application is to be made for 2000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME.
The issue constitutes 38.09% of the post issue paid-up equity capital of the company. SIL is spending Rs. 0.55 cr. for this IPO process.
The issue is solely lead managed by Finshore Management Services Ltd. and Cameo Corporate Services Pvt. Ltd. is the registrar to the issue. Econo Broking Pvt. Ltd. is the market maker for this company.
Having issued initial equity at par, SIL issued further equity in the price range of Rs. 40 – Rs. 50 between February 2021 to June 2021. It has also issued bonus shares in the ratio of 2 for 1 in September 2021. The average cost of acquisition of shares by the promoters is Rs. 14.36 per share.
Post IPO, SIL’s current paid-up equity capital of Rs. 1.95 cr. will stand enhanced to Rs. 3.15 cr. Based on the IPO price, the company is looking for a market cap of Rs. 17.33 cr.
On the financial performance front, for the last three fiscals, SIL has posted turnover/net profits of Rs. 12.05 cr. / Rs. 0.03 cr. (FY20), Rs. 32.56 cr. / Rs. 0.23 cr. (FY21) and Rs. 95.93 cr. / Rs. 0.33 cr. (FY22).
For the last three fiscals, the company has reported an average EPS of Rs. 7.00 and an average RoNW of 20.45%. The issue is priced at a P/BV of 3.16 based on its NAV of Rs. 17.38 as of March 31, 2022, and at a P/BV of 1.73 based on its post-IPO NAV of Rs. 31.71.
If we attribute FY22 earnings on post IPO fully diluted equity, then the asking price is at a P/E of 51.89 making it a greedily priced offer.
COMPARISON WITH LISTED PEERS:
As per the offer document, SIL has shown Pioneer Embroideries, Hisar Spg., Dhanlaxmi Roto and Vippy Spinpro as its listed peers. They are currently trading at a P/E of 10.34, 3.58, 4.61 and 5.18 (as of June 09, 2022). However, they are not truly comparable on an apple-to-apple basis.
The company has not declared any dividend for the reported periods of the offer document. It will adopt a prudent dividend policy based on its financial performance and future prospects.
MERCHANT BANKER’S TRACK RECORD:
This is the 24th mandate from Finshore Management in the last five fiscals (including the ongoing one). Out of the last 10 listings, 2 opened at par and the rest with premiums ranging from 3% to 65.5% on the day of listings.
Conclusion / Investment Strategy
Though the company has reported a growing pattern for its top and bottom lines, its low margin raises concerns. Based on petty earnings, its IPO is priced greedily. A low post-IPO equity capital base indicates longer gestation for migration to the main board. There is no harm in ignoring this pricy issue.
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 information published here. With entry barriers, SEBI wants only well-informed investors to participate in such offers. With crazy listings in the past, SME IPOs drew the attention of investors across the board. However, as SME issues have entry barriers and continued low preference from the broking community, any reader taking decisions based on any information published here does so entirely at own risk. The above information is based on information available as on date coupled with market perceptions. The Author has no plans to invest in this offer.
(SEBI registered Research Analyst-Mumbai).
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.
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