Patron Exim BSE SME IPO review (Avoid)
• PEL is in the business of trading and distribution of pharma and chemical products.
• The company depends on third-party product marketing.
• It has shown a mismatch in its top and bottom lines.
• Higher spending for the IPO process indicates arranged funding.
• There is no harm in skipping this pricey issue.
PEL is the group company that had two SME IPOs earlier i.e. Earum Pharma and Evoq Remedies. Both these counters are trading at a discount to their issue price currently. Now the group is coming out with a third company having a similar business. This IPO is also priced aggressively.
Patron Exim Ltd. (PEL) is engaged in the trading and distribution of a wide range of pharmaceutical raw material which is also known as APIs (Active Pharmaceutical Ingredients), industrial chemical, excipient and solvents. Presently its product portfolio comprises of around 150 AIPs, Excipient, Pharma Chemical & Intermediates.
PEL is also in the trading of a variety of chemicals, such as Petrochemicals, Dyes & Pigment Chemicals, Paints & Speciality Chemical, Agro Chemicals, Oil & Refinery Chemicals, Foam & Adhesive, Plywood & Laminates Chemical. The range of Chemicals also includes food industry & water treatment chemicals, resins & plastics chemicals, polymers and additives etc. As of the date of the prospectus, its business expansion is located in Ahmedabad and the surrounding area of Gujarat. As of December 22, 2022, it had 9 employees on its payroll.
The group has other companies that are engaged in similar business and may pose a clash of interests. They are Earum Pharmaceuticals Ltd., Evoq Remedies Ltd., and Auxilia Pharmaceuticals Pvt. Ltd. Madrid Diamond Pvt. Ltd. is also the associate company.
ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden IPO of 6180000 equity shares of Rs. 10 each at a fixed price of Rs. 27 per share to mobilize Rs. 16.69 cr. The issue opens for subscription on February 21, 2023, and will close on February 24, 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 26.66% of the post-issue paid-up equity capital of the company. PEL is spending Rs. 1.42 cr. for this IPO process and from the net proceedings, it will utilize Rs. 11.47 cr. for working capital, and Rs. 3.80 cr. for general corporate purposes.
Interactive Financial Services Ltd. is the lead manager and Bigshare Services Pvt. Ltd. is the registrar of the issue. Sunflower Broking Pvt. Ltd. is the market maker for the company. This issue is underwritten by Lead Manager for only 15% while the market maker is having the rest portion.
Having issued/converted initial equity at par, the company issued/converted further equity at a price of Rs. 27 per share in December 2022. The average cost of acquisition of shares by the promoters is Rs. NIL per share.
Post IPO, PEL’s current paid-up equity capital of Rs. 17.00 cr. will stand enhanced to Rs. 23.18 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 62.59 cr.
On the financial performance front, for the last three fiscals, PEL has posted a turnover/net profit of Rs. 25.16 cr. / Rs. 0.02 cr. (FY20), Rs. 20.54 cr. / Rs. 0.07 cr. (FY21), and Rs. 5.02 cr. / Rs. 0.83 cr. (FY22). For the first 8 months of FY23 ended on November 30, 2022, it earned a net profit of Rs. 1.45 cr. on a turnover of Rs. 10.54 cr. For the last three fiscals, while its top line marked de-growth, its bottom line kept surging and that raise eyebrows. The sudden boost in net profits for the last 20 months working is surprising.
For the mismatch in its top and bottom lines, as explained on page 69 of the offer document, the company had switched to acting as a commission agent and charging the commission instead of purchasing the goods and selling the goods.
For the last three fiscals, PEL has reported an average EPS of Rs. 0.91 and an average RoNW of 9.12%. The issue is priced at a P/BV of 2.49 based on its NAV of Rs. 10.84 as of November 30, 2022, and at a P/BV of 1.63 based on its post-IPO NAV of Rs. 16.54 per share.
If we annualize FY23 earnings and attribute it to the post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of around 28.72. Thus the issue is aggressively priced.
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 Vaishali Pharma and Earum Pharma as their listed peers. They are currently trading at a P/E of 23.60 and 14.12 (as of February 17, 2023). However, they are not truly comparable on an apple-to-apple basis.
MERCHANT BANKER’S TRACK RECORD:
This is the 6th mandate from Interactive Financial in the last two fiscals (including the ongoing one). Out of the last 5 listings, 2 opened at discount and the rest with premiums ranging from 0.08% to 2.22% on the listing day. Thus it has a poor track record.
Conclusion / Investment Strategy
The company is in trading/distribution only and has no manufacturing activities. Based on its financial track records, the issue is aggressively priced. Higher spending for the IPO indicates arranged funding. The is no harm in skipping this pricey 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.