Gayatri Rubber NSE SME IPO review (Avoid)
• GRCL is engaged in the manufacturing and marketing of rubber profiles of various types.
• Inflated earnings for the last 21 months raise eyebrows.
• Based on FY23 annualized earnings, the issue appears aggressively priced.
• There is no harm in ignoring this pricey issue.
Gayatri Rubbers and Chemicals Ltd. (GRCL) is engaged in the manufacturing and trading of rubber profiles, aluminium rubber profiles, automobile rubber profiles, rubber compounds, various kinds of rubber components, and clear PVC profiles. It supplies these rubber products across India to the dealers of Nalco, Banco, and Jindal in the aluminium sector and the agents of Motherson Sumi and a few other state transports in the automobile sector.
The company supplies rubber compounds to other rubber product manufacturers and OEMs. It procures raw materials/trading goods from Delhi NCR, Gujarat, Kerala, and other parts of India. For instance, natural rubber / EPDM rubber is sourced from Kerala, calcium carbonate/ chalk powder is sourced from Gujarat, and zinc and some other goods are sourced from Delhi NCR. As of December 31, 2022, it had 16 employees on its payroll and around 30 contract labourers.
ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden IPO of 1528000 equity shares of Rs. 10 each at a fixed price of Rs. 30.00 per share to mobilize Rs. 4.58 cr. The issue opens for subscription on January 25, 2023, and will close on January 30, 2023. The 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 26.63% of the post-IPO paid-up equity capital of the company. The company is spending Rs. 0.40 cr. for this IPO process, and from the net proceeds of the IPO, the company will utilize Rs. 3.50 cr. for working capital, and Rs. 0.68 cr. for general corporate purposes.
Khambatta Securities Ltd. is the sole lead manager for this issue and Skyline Financial Services Pvt. Ltd. is the registrar of the issue. Khambatta Securities Ltd. is also the market maker of the company.
The company has issued entire equity shares at par value so far. The average cost of acquisition of shares by the promoters is Rs. 10.00 per share.
Post-IPO, GRCL’s current paid-up equity capital of Rs. 4.21 cr. will stand enhanced to Rs. 5.74 cr. Based on the upper cap of the issue price, the company is looking for a market cap of Rs. 17.21 cr.
On the financial performance front, for the last three fiscals, GRCL has posted a turnover/net profit of Rs. 6.57 cr. / Rs. 0.07 cr. (FY20), Rs. 15.63 cr. / Rs. 0.15 cr. (FY21), and Rs. 16.74 cr. / Rs. 0.81 cr. (FY22). For the H1 of FY23, it earned a net profit of Rs. 0.55 cr. on a turnover of Rs. 16.65 cr.
For the last three fiscals, GRCL has reported an average EPS of Rs. 8.83 and an average RoNW of 33.67%. The issue is priced at a P/BV of 1.00 based on its NAV of Rs. 29.88 (???) as of March 31, 2022, and at a P/BV of 1.87 based on its post-IPO NAV of Rs. 16.04 per share. (The offer document is silent on GRCL’s NAV as of December 31, 2022 data)
If we annualize FY23 earnings and attribute it to post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 23.62. Thus the issue appears aggressively priced.
The company has not declared any dividends since incorporation. It will adopt a prudent dividend policy post-listing, based on its financial performance and future prospects.
COMPARISON WITH LISTED PEERS:
As per the offer document, the company has no listed peers to compare with.
MERCHANT BANKER’S TRACK RECORD:
This is the 1st mandate from Khambatta Securities in the last three fiscals (including the ongoing one). Its last IPO mandate was in July 2018 which opened at a premium of 0.61%.
Conclusion / Investment Strategy
The boost in margins for the last 21 months of working is a bit surprising and raises concern. It is engaged in a highly competitive and fragmented segment. Based on its FY23 earnings, the issue is aggressively priced. Small equity base post listing indicates longer gestation for migration to the main board. There is no harm in ignoring this pricey bet.
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.