QMS Medical NSE SME IPO review (Avoid)

•    The company has increased its IPO size with the change of Lead Manager.
  •    Though its top line marked growth, the bottom line expressed pressure on margins.
  •    It operates in a highly competitive and fragmented segment.
  •    Based on FY22 earnings, the issue appears fully priced. 
  •    There is no harm in skipping this issue.

  PREFACE:
  This company originally filed its draft prospectus through Aryaman Financial Services Ltd. in January 2021 for a 1224000 equity shares issue (including OFS for 600000 shares). Later on, it filed a new draft prospectus through First Overseas for 4700000 equity shares (including OFS for 1900000 shares). This company is fully dependent on third-party contracts which is very risky. Margins posted by this company also raise eyebrows. The sustainability of such performance going forward is a major concern. 

ABOUT COMPANY:
QMS Medical Allied Services Ltd. (QMASL) is engaged in the marketing and distribution of a wide range of medical and healthcare devices and accessories. It markets and distributes these products to various end users such as clinics, pharma, and medical companies and also to individual users. These devices are sold directly in the brand of the manufacturer and also under their own brand.

The company has more than 600 SKUs which it sells to over 130 customers. Recently it launched the brand “Q-Devices” with an intention to provide affordable and quality products in the market so as to become a customer-preferred medical device company. The company gets products manufactured in India from third-party manufacturers, under its own brand. It already has products such as a glucometer, pulse oximeter, IR thermometer, BP Monitor, Anatomy set, Neurology kit, Orthopaedic Aids, and Weighing Scales.

QMASL also deals in medical consumables such as disinfectants, filters, infection prevention tools, compression bandages, wound management dressing kits, and dental products amongst others. As of April 30, 2022, it had 52 employees on its payroll.

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its need for working capital (Rs. 27.00 cr.), general corporate purposes (Rs. 6.58 cr.), QMASL is coming out with a maiden IPO of 4700000 equity shares of Rs. 10 each at a fixed price of Rs. 121.00 per share to mobilize Rs. 56.87 cr. The issue consists of 2800000 fresh equity shares and 1900000 shares as OFS. The issue opens for subscription on September 27, 2022, and will close on September 30, 2022. The minimum application is to be made for 1000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 26.33% of the post-issue paid-up capital of the company. QMASL is spending Rs. 0.50 cr. for this IPO process (including Rs. 0.30 cr. for the fresh equity issue).

The issue is solely lead managed by First Overseas Capital Ltd and Bigshare Services Pvt. Ltd. is the registrar to the issue. Rikhav Securities Ltd. is the market maker for this IPO and has underwritten 85% of the issue. Thus higher underwriting by a market maker is raising eyebrows.

The company has issued entire equity shares at par so far. It has also issued bonus shares in the ratio of 300 for 1 in November 2019, 1 for 4 in October 2020, and 3 for 1 in June 2022. The average cost of acquisition of shares by the promoters is Rs. 0.01 per share.

Post-IPO, QMASL’s current paid-up equity capital of Rs. 15.05 cr. will stand enhanced to Rs. 17.85 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 215.99 cr.

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, QMASL has posted a turnover/net profit of Rs. 72.78 cr. / Rs. 6.35 cr. (FY20), Rs. 122.09 cr. / Rs. 10.92 cr. (FY21), and Rs. 147.75 cr. / Rs. 10.71 cr. (FY22). Though it marked growth in its top line, its bottom line witnessed pressure on margins.

For the last three fiscals, QMASL has reported an average EPS of Rs. 6.68 and an average RoNW of 46.42%. The issue is priced at a P/BV of 5.87 based on its NAV of Rs. 20.62 as of March 31, 2022, and at a P/BV of 3.33 based on its post-IPO NAV of Rs. 36.36 per share.

If we attribute FY22 earnings to post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 20.10. Based on its latest workings, the issue appears fully priced.

DIVIDEND POLICY:
The company has not declared/paid any dividend 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 offer documents, QMASL has no listed peers to compare with.

MERCHANT BANKER’S TRACK RECORD:
This is the 12th mandate from First Overseas in the last four fiscals (including the ongoing one). Out of the last 10 listings, 1 opened at discount, 3 opened at par and the rest with premiums ranging from 1.4% to 120% on the day of listing.

Conclusion / Investment Strategy

The company operates as a third-party supplier of medical and healthcare devices. This is a highly competitive and fragmented segment. The sustainability of margins going forward raises concern. Based on FY22 earnings, the issue is fully priced. It has increased the IPO size with the change of Lead Manager. Considering all these, there is no harm in skipping this issue.

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