Rite Zone NSE SME IPO review (Avoid)
• RZCIL deals in construction chemicals and concrete products.
• Sudden boost in its top and bottom line for H1 of FY23 raises eyebrows.
• Even based on super earnings, the issue is exorbitantly priced.
• Small equity base post IPO indicates longer gestation for migration to the mainboard.
• There is no harm in skipping this pricy IPO.
Rite Zone Chemcon India Ltd. (RZCIL) is in the business of construction chemicals and concrete products. It deals in the range of construction chemicals and concrete products and offers complete construction solutions by supplying a complete range of various chemical products related to civil construction, infrastructure, building & structure including pre-construction or post construction as well as supplying all types of concrete required for construction and infrastructure developments.
Construction chemicals are chemical compounds used in construction works. They are used to speed up the process or add more sustainability and strength to the structures. The addition of construction chemicals to various building materials during the construction work improves performance, and workability adds functionality and protects the basic or customized elements of a structure.
Its range of products includes Concrete Admixture, Water Proofing Systems, Concrete Lubricators, Engineering Grouts, Industrial Flooring, Concrete Repairs, Curing Compound & Mould Release Agent, Surface Treatment, Tiling & Block Products. The Company also deals in a range of concrete products such as slump concrete, flowable concrete, self-compaction concrete (SCC), Light Weight Concrete, Stamp Concrete, Color Concrete, PQC Concrete, Early Strength Concrete, Reinforce Concrete, Shotcrete Concrete, Precast Concrete, Pile Concrete, Air Entrench Concrete, Prestressed Concrete, High Strength Concrete Etc. As of September 30, 2022, it had 13 employees on its payroll. It operates in a highly competitive and fragmented segment.
ISSUE DETAILS/CAPITAL HISTORY:
To part finance its needs for working capital (Rs. 6.75 cr.), and general corporate purpose (Rs. 0.50 cr.), RZCIL is coming out with a maiden IPO of 1195200 equity shares of Rs. 10 each at a fixed price of Rs. 75 per share to mobilize Rs. 8.96 cr. The issue opens for subscription on October 31, 2022, and will close on November 02, 2022. A minimum application is to be made for 1600 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 28.25% of the post-IPO paid-up capital of the company. RZCIL is spending Rs. 1.71 cr. for this IPO process. Higher expenses for the IPO process indicate a fully structured process of funding arrangements for this issue.
The sole lead manager for this IPO is Expert Global Consultants Pvt. Ltd., and Skyline Financial Services Pvt. Ltd. is the registrar to the issue. Rikhav Securities Ltd. is the market maker for this company.
Having issued initial equity shares at par, the company issued/converted further equity shares at a price of Rs. 17 per share in May 2021, and March 2022. The average cost of acquisition of shares by the promoters is Rs. 8.77, Rs. 14.30 per share.
Post-IPO, RZCIL’s current paid-up equity capital of Rs. 3.04 cr. will stand enhanced to Rs. 4.23 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 31.73 cr.
On the financial performance front, for the last three fiscals, RZCIL has reported a total income/net profit of Rs. 5.75 cr. / Rs. 0.16 cr. (FY20), Rs. 3.84 cr. / Rs. 0.01 cr. (FY21), and Rs. 5.66 cr. / Rs. 0.26 cr. (FY22). For the first half of FY23 ended on September 30, 2022, it earned a net profit of Rs. 0.18 cr. on a total income of Rs. 10.36 cr. The sudden boost in the top and bottom line for H1 of FY23 raises eyebrows.
For the last three fiscals, RZCIL has posted an average EPS of Rs. 1.22 and an average RoNW of 7.21%. The issue is priced at a P/BV of 4.38 based on its NAV of Rs. 17.13 as of September 30, 2022, and at a P/BV of 2.24 based on its post-IPO NAV of Rs. 33.48.
If we annualized FY23 earnings and attribute them to the post-IPO fully diluted paid-up equity capital of the company, then the asking price is at a P/E of around 90.36. Thus based on super earnings too, the issue is exorbitantly priced.
The company has not declared any dividends for the reported periods of the offer documents. It will adopt a prudent dividend policy based on its financial performance and future prospects.
COMPARISON WITH LISTED PEERS:
As per the offer document, RZCIL has no listed peers to compare with.
MERCHANT BANKER’S TRACK RECORD:
The Lead Manager has no track record as this is the first mandate from its stable.
Conclusion / Investment Strategy
RZCIL is in a highly competitive and fragmented segment. It has priced the IPO exorbitantly even on the basis of its super earnings. A small equity base post-IPO indicates s longer gestation period for migration to the mainboard. There is no harm in skipping 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.