Veekayem Fashion NSE SME IPO review (Avoid)
• VFAL is in the textile business which is a highly competitive and fragmented segment.
• The company is issuing shares to the public at a lower cost compared to the promoter’s acquisition costs.
• It has posted inconsistency in its top and bottom lines for the reported periods.
• The issue is fully priced based on its financial performance.
• There is no harm in skipping this IPO.
Veekayem Fashion & Apparels Ltd. (VFAL) is engaged in the business of weaving and garment manufacturing. It is majorly engaged in the business of manufacturing for various brands, however, the company also caters to exports and local markets in customized designs as requested by clients and customers in the textile and apparel industry.
VFAL deals in a range of products like Shirting fabrics, Suiting Fabrics, Trouser fabrics, jacketing fabrics, format trousers, cotton trousers and other accessories etc. Its extensive product portfolio of 100% Cotton – Lycra and Non-Lycra, Giza, Supima, Blended Cotton Suiting – Chief Value Cotton, Polyester Cotton, 100% Cotton Yarn Dyed, Polyester Viscose, Terry Rayon Suiting and Mock Linen. As of the filing of this offer document, it had 825 employees on its payroll.
ISSUE DETAILS/CAPITAL HISTORY:
To part finance its needs for working capital (Rs. 4.00 cr.), general corporate purposes (Rs. 0.01 cr.), VFAL is coming out with a maiden IPO of 1584000 equity shares of Rs. 10 each at a fixed price of Rs. 28 per share to mobilize Rs. 4.44 cr. The issue opens for subscription on August 05, 2022, and will close on August 11, 2022. Minimum application is to be made for 4000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 26.96% of the post-IPO paid-up capital of the company. VFAL is spending Rs. 0.43 cr. for this IPO process. This indicates the structured nature of this IPO.
The issue is solely lead managed by GYR Capital Advisors Pvt. Ltd., KFin Technologies Ltd. is the registrar to the issue and Econo Broking Pvt. Ltd., is the market maker for this IPO.
Having issued initial equity at par, the company issued further equity shares in the price range of Rs. 90 – Rs. 100 between March 2006 and February 2013. The average cost of acquisition of shares by the promoters is Rs. 74.04, Rs. 74.89 and Rs. 84.98 per share. This is perhaps the first such IPO whereby the new shares are issued at a much lower price compared to the cost of acquisition of shares by the promoters. This appears somewhat fishy as the company does not have documentary evidence for the capital built up prior to IPO.
Post-IPO, VFAL’s current paid-up equity capital of Rs. 4.29 cr. will stand enhanced to Rs. 5.88 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 16.45 cr.
On the financial performance front, for the last three fiscals, VFAL has posted turnover/net profits of Rs. 215.72 cr. / Rs. 1.09 cr. (FY20), Rs. 76.70 cr. / Rs. 0.35 cr. (FY21) and Rs. 149.47 cr. / Rs. 1.89 cr. (FY22). Thus it has shown inconsistency in its top and bottom lines. Boosted profits on a lower turnover achieved for FY22 appears pre-IPO window dressing.
For the last three fiscals, VFAL has posted an average EPS of Rs. 2.89 and an average RoNW of 4.08%. The issue is priced at a P/BV of 0.39 based on its NAV of Rs. 72.12 as of March 31, 2022, and at a P/BV of 0.47 based on its post-IPO NAV of Rs. 60.22 per share.
If we attribute FY22 earnings on post IPO fully diluted equity, then the asking price is at a P/E of around 8.72 making it a fully priced issue.
COMPARISON WITH LISTED PEERS:
As per the offer document, VFAL has shown Page Ind., Indian Terrain and Monte Carlo. They are currently trading at a P/E of 102.3, 00 and 13.56 (as of August 01, 2022). However, compare with Page Ind. And Monte Carlo is really surprising. They are not truly comparable on an apple-to-apple basis.
The company has not declared any dividends for the reported periods of the offer documents. It will adopt a prudent dividend policy post listing based on its financial performance and future prospects.
MERCHANT BANKER’S TRACK RECORDS:
This is the 5th mandate from GYR Capital in the last two fiscals (including the ongoing one). Out of the last four listings, all listed with a premium ranging from 2.45% to 6.15% on the day of listings. Thus it has an average track record.
Conclusion / Investment Strategy
The company is in the highly competitive and fragmented segment of textiles with many unorganized players. For the last three fiscals, it has shown inconsistency in its top and bottom lines. The surge in profits on a lower turnover for FY22 raises eyebrows. The sustainability of such earnings going forward is a major concern. Based on its financial data, the issue is fully priced with super earnings for FY22. There is no harm in skipping this issue.
Review By Dilip Davda on Aug 1, 2022
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.