Shera Energy NSE SME IPO review (May apply)
- SEL is engaged in the business of manufacturing a wide range of non-ferrous wires/strips/rods etc.
• The company has posted growth in its top and bottom lines for the past 18 months.
• It is operating in a highly competitive segment with many big and small players.
• Based on H1-FY23 earnings, the issue appears fully priced.
• Well-informed/cash surplus investors may consider parking funds for the long term.
Shera Energy Ltd. (SEL) is primarily engaged in the business of manufacturing winding wires and strips made of non-ferrous metals primarily Copper and Aluminium. The company also manufactures wire rods, wires, and tubes of Copper and Brass. These wires, tubes, and rods are manufactured in various shapes and sizes as per the requirement of the customers and/or demand in the market. Its product range includes paper-covered wires, enamel, and fibre covered wires, round wires, rectangular wires, bunched wires, tubes, rods, strips, etc.
The Company has also commenced manufacturing special-grade brass rods through a Cold Extrusion process suitable to make bullet shells for defense applications. The Company has successfully done the requisite trials and tests on this with customers. This product has been recently developed by the company on account of demand in the ammunition industry in our country. Over the past couple of years, SEL has outgrown itself into a distinguished large-scale organization specializing in wires, tubes, and rods of various shapes, sizes, and various non-ferrous metals having plentiful applications.
In order to expand the business and to get the benefits of backward and forward integration, SEL has invested/acquired/incorporated three subsidiary companies namely, Rajputana Industries Private Limited, Shera Metal Private Limited, and Shera Infrapower Private Limited to add value-added products in the existing portfolio. As of September 30, 2022, it had 146 employees on its payroll.
ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden book-building route IPO of 6176000 equity shares of Rs. 10 each. It has announced a price band of Rs. 55 – Rs. 57 per share. At the upper cap, the company is looking to mobilize Rs. 35.20 cr. at the upper price band. The IPO consists of a fresh equity issue of 1048000 shares (Rs. 5.97 cr.) and 5128000 shares (Rs. 29.23 cr.) by way of an offer for sale (OFS). The issue opens for subscription on February 07, 2023, and will close on February 09, 2023. The minimum application is to be made for 2000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge.
The issue constitutes 27.10% of the post-IPO paid-up equity capital of the company. After the market maker quota of 400000 shares and eligible employees’ quota of 600000 shares, the company has allocated up to 48.42% for QIBs, 15.84 % for HNIs, and 35.74% for Retail investors. From the net proceeds of the IPO funds, it will utilize Rs. 4.25 cr. for the working capital, and the rest for general corporate purposes. Around 80% of IPO is by way of OFS and the odd allocation for investors is a bit surprising.
Holani Consultants Pvt. Ltd. is the sole lead manager for this issue and Bigshare Services Pvt. Ltd. is the registrar of the issue. Holani Consultants Pvt. Ltd. is also the market maker of the company.
Having issued initial equity shares at par value, the company issued further equity shares in the price range of Rs. 14 – Rs. 100 per share between March 2011 and January 2023. It has also issued bonus shares in the ratio of 1 for 3 in March 2012. The company has done a pre-IPO placement of 1800000 shares at a price of Rs. 56 per share in January 2023 to a few HNIs. The average cost of acquisition of shares by the promoters is Rs. 7.50, Rs. 7.78, Rs. 8.59, and Rs. 19.50 per share.
Post-IPO, SEL’s current paid-up equity capital of Rs. 21.74 cr. will stand enhanced to Rs. 22.79 cr. Based on the upper cap of the issue price, the company is looking for a market cap of Rs. 129.89 cr.
According to the management, Emerging India Funds provided the necessary capex funding to the company in 2015 and since the fund had a tenor of five years, this IPO for OFS was scheduled for 2020, but due to the Pandemic, it was delayed and now finally it is happening. Emerging Funds is fully exiting the company with the OFS.
On the financial performance front, for the last three fiscals, SEL has (on a consolidated basis) posted a turnover/net profit of Rs. 426.19 cr. / Rs. 3.61 cr. (FY20), Rs. 422.72 cr. / Rs. 5.03 cr. (FY21), and Rs. 524.58 cr. / Rs. 7.00 cr. (FY22). For the H1 of FY23 ended on September 30, 2022, it earned a net profit of Rs. 4.28 cr. on a turnover of Rs. 339.54 cr.
Currently, the export revenue of the company is around 10% of the total turnover and with the planned expansion of its portfolio with high-margin products, it aims to see 35-40% export revenue in the coming few years.
For the last three fiscals, SEL has reported an average EPS of Rs. 2.90 and an average RoNW of 9.07%. The issue is priced at a P/BV of 1.61 based on its NAV of Rs. 35.38 as of September 30, 2023, and at a P/BV of 1.5 based on its post-IPO NAV of Rs. 38.00 per share (at the upper price band).
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 15.16. Thus on the basis of its current earnings, the issue appears fully priced, but considering its growth plans, this is a long race horse.
The company has not declared any dividends for the reported periods of the offer document. 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 shown Precision Wires, Rajnandini Metals, RamRatna Wires, Cubex Tubings, and Bhagyanagar India as their listed peers. They are currently trading at a P/E of around 16.86, 28.37, 14.30, 18.81, and 51.32 (as of February 03, 2023). However, they are not truly comparable on an apple-to-apple basis.
MERCHANT BANKER’S TRACK RECORD:
This is the 4th mandate from Holani Consultants in the last three fiscals (including the ongoing one). Out of the last 3 listings, 2 IPO closed below the offer price on the listing date.
Conclusion / Investment Strategy
The company is operating in a highly competitive segment as indicated by its profit margins. It has worrisome debt (Rs. 136.71 cr. as of September 30, 2022, including cash-credit facility), odd allocation of IPO quota and over 80% of IPO is by way of OFS. Continued growth in the top and bottom line is the only positive factor. Based on its FY23 earnings, the issue appears fully priced. Well-informed cash surplus investors may consider investing with a long-term perspective.
Review By Dilip Davda on Feb 3, 2023
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.