Indong Tea BSE SME IPO review (Avoid)


Indong Tea BSE SME IPO review (Avoid)

 ITCL is in the tea plantations with average performance.
•    Listed parent company is faring badly with a poor track record.
•    It has modified a bit its objects of the issue if compared with its Sept.22 documents.
•    Results for H1 of FY23 appear to have been window dressing to suit the asking price.
•    There is no harm in skipping this high-risk bet. 

The company filed its draft prospectus in August 2022 for its maiden IPO and also planned entry in the month of September 2022, but the issue finally stood withdrawn just before opening. Now it is planning for a second time to launch the IPO. Its restated financial data for H1 of FY23 appears as a window dressing to get the fancy valuation.

Indong Tea Company Ltd. (ITCL) is an Asian group company. Parent company Asian Tea & Exports Ltd. is already a listed entity that planned delisting in September 2001 but continues to remain listed and issued right shares in November 2021. It is faring poorly with thin volumes. It has no dividend track record either.

ITCL is engaged in Tea Plantation & Manufacturing of CTC Tea at Indong Tea Estate situated in Jalpaiguri District of West Bengal. The Indong Tea Estate is spread over an area of 740.38 Hectares which comprises of Tea Plantation, Tea Factory, Withering Trough House, Officer’s Bungalows, Staff Quarters, Labour Quarters, Pump House, General Stores, Dairy Farm etc. It currently employs 1346 employees on its payroll (including 158 temporary employees).

To part finance its need for refurbishing its existing tea plantations (Rs. 6.32 cr.), additional plant and machinery for existing plantations (Rs. 2.94 cr.), working capital (Rs. 2.25 cr.), and general corporate purposes (Rs. 1.00 cr.), ITCL is coming out with a maiden IPO of 5004000 equity shares of Rs. 10 each at a fixed price of Rs. 26 per share to mobilize Rs. 13.01 cr. The issue opens for subscription on February 09, 2023, and will close on February 13, 2023. The minimum application is to be made for 4000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. The issue constitutes 33.36% of the post-IPO paid-up equity capital of the company. ITCL is spending Rs. 0.50 cr. for this IPO process.

Finshore Management Services Ltd. is the sole lead manager for the IPO, and Cameo Corporate Services Ltd. is the registrar of the issue. Nikunj Stock Brokers Ltd. is the market maker for the company.

After issuing initial equity shares at par, the company converted loans into equity at a price of Rs. 33 per share in January 2022. The average cost of acquisition of shares by the promoters is Rs. 8.24, Rs. 14.48, and Rs. 23.24 per share.

Post this IPO, ITCL’s paid-up equity capital of Rs. 10.00 cr. will stand enhanced to Rs. 15.00 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 39.00 cr.

On the financial performance front, for the last three fiscals, ITCL has reported a turnover/net profit – (loss) of Rs. 16.73 cr. / Rs. – (1.21) cr. (FY20), Rs. 23.13 cr. / Rs. 1.28 cr. (FY21), and Rs. 19.93 cr. / Rs. 1.32 cr. (FY22). For H1 of FY23, it earned a net profit of Rs. 2.05 cr. on a turnover of Rs. 13.24 cr. There appears to be a window dressing to get the fancy valuations.

For the last three fiscals, ITCL has posted an average EPS of Rs. 1.50 and an average RoNW of 2.54%. The issue is priced at a P/BV of 2.43 based on its NAV of Rs. 10.69 as of September 30, 2022, and at a P/BV of 1.65 based on its post-IPO NAV of Rs. 15.79 per share.

If we attribute FY23 earnings to post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 9.52. And based on its FY22 earnings it comes at a P/E of 29.54. Thus the issue is aggressively priced based on FY22 data but appears fully priced based on FY23 earnings. The sustainability of earnings shown for H1 of FY23 is a major concern. 

As per the offer documents, ITCL has shown Tata Consumer Products, Goodricke Group, Dhunseri Tea, and Neelamalai Agro as their listed peers. They are currently quoting at a P/E of 74.67, – 34.28, – 2.08, and 58.65 (as of February 07, 2023).  However, they are not truly comparable on an apple-to-apple basis. The comparison with giants in the segment is really surprising. 

The company has not declared/paid any dividend for the reported periods of the offer document. It will adopt a prudent dividend policy post IPO, based on its financial performance and future prospects.

This is the 33rd mandate from Finshore Management in the last five fiscals (including the ongoing one). Out of the last 10 listings, 2 opened at discount, 1 at par, and the rest with premiums ranging from 0.91% to 150.00% on the day of listing.


Conclusion / Investment Strategy

ITCL is in tea plantations and is poised for bright prospects as tea prices are firming up globally. The issue is fully priced based on its H1-FY23 earnings while it is aggressively priced based on its FY22 data. The parent company is having a poor track record. Though it is poised for better prospects, the poor track record of the group company, and the fully priced offer from ITCL, there is no harm in skipping it.

Review Author

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.