Arabian Petroleum NSE SME IPO review (May apply)

Arabian Petroleum NSE SME IPO review (May apply)

• APL is in the business of manufacturing a wide range of lubricants etc.
• The company marked steady growth in its top lines for the reported periods.
• It posted 10+% PAT for the last two fiscals.
• Based on FY23 earnings, the issue appears fully priced.
• Well-informed investors may park moderate funds for the medium to long-term rewards.

ABOUT COMPANY:

Arabian Petroleum Ltd. (APL) is in the business of manufacturing a wide range of Lubricants including Specialty Oils, Coolants, etc., used for Industrial and Automotive applications. Its business is categorized into two distinctive product divisions: (i) Automotive Lubricants – Arzol and (ii) Industrial Lubricants – SPL. The company is dedicated to consistently providing products that deliver stellar quality and comply with statutory requirements in the Automotive and Industrial Lubricants domain.

The company started its manufacturing activities with 10 blending machines. In the year 2019, it further expanded manufacturing activities to Factory Unit-2 and added 2 more blending machines with a total installed capacity of 40590 KLPA. In the year 2021, the company was licensed by the American Petroleum Institute (API) to use API marks on some of its products like Arzol, Milage, Synactiv, Arzol Super Duty, and Arzol Synpros. It has product approval certification from Volvo Group Trucks Technology, Renault Group, and MACK Trucks for the product “Milage Synactivs 15W-40” engine oil. The company has recently received OEM approval from Bharat Earth Movers Limited (Formerly – BEML Limited) for their entire range of products like Engine oil, hydraulic oil, etc.

APL also manufactures and packages lubricants on a private label basis for some of the customers for B2B as well as B2C verticals. Some of its clientele include Varroc Engineering Limited, Mahindra First Choice Services Limited, Greaves Cotton Limited, Gabriel India Limited, Ki Mobility Solutions Private Limited – TVS Group Company, HELLA India Lighting Ltd, Petrelplus Inc, Nand Persaud & Co Ltd, J K Files (India) Limited – a Raymond Group Company, Godrej & Boyce Manufacturing Co. Ltd, etc. It also has government clientele including BEML Limited, Bharat Coking Coal Limited, Bharat Electronics Limited, Bharat Heavy Electricals Limited, Hindustan Aeronautics Limited, Indian Air Force, Mazagon Dock Shipbuilders Limited, Indian Navy (Controller of Procurement Material Organization), Municipal Corporation of Greater Mumbai, Indian Railway, Western Coalfields Limited, Southeastern Coalfields Limited, Northern Coalfields Limited etc.

APL sells automotive lubricants under the brand name “Arzol” and Industrial lubricants under the brand name “SPL Lubricants”. As of March 31, m2023, it had 207 employees on its payroll. It also employs contractual manpower as and when needed.

ISSUE DETAILS/CAPITAL HISTORY:

The company is coming out with a maiden IPO of 2892000 equity shares of Rs. 10 each at a fixed price of Rs. 70 per share to mobilize Rs. 20.24 cr. The issue opens for subscription on September 25, 2023, and will close on September 27, 2023. The minimum application to be made is for 2000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 26.55% of the post-IPO paid-up capital of the company. The company is spending Rs. 1.38 cr. for this IPO process, and from the net proceeds, it will utilize Rs. 14.00 cr. for working capital and Rs. 4.86 cr. for general corporate purposes.

After reserving 148000 shares for the market maker, the company has allocated 1372000 shares for other than Retail investors, and 1372000 shares for Retail investors.

Hem Securities Ltd. is the sole lead manager and Purva Sharegistry (India) Pvt. Ltd. is the registrar of the issue. Hem Group’s Hem Finlease Pvt. Ltd. is the market maker for the company.

Having issued initial equity shares at par value, the company issued further equity shares at a fixed price of Rs. 20 per share (based on Rs. 10 FV), in December 2009 and October 2011. It has also issued bonus shares in the ratio of 3 for 1 in April 2022. The average cost of acquisition of shares by the promoters is Rs. 2.97, and Rs. 3.09 per share.

Post-IPO, APL’s current paid-up equity capital of Rs. 8.00 cr. will stand enhanced to Rs. 10.89 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 76.24 cr.

FINANCIAL PERFORMANCE:

On the financial performance front, for the past three fiscals, the company has posted a total revenue/net profit of Rs. 110.25 cr. / Rs. 2.88 cr. (FY21), Rs. 191.59 cr. / Rs. 4.14 cr. (FY22), and Rs. 243.95 cr. / Rs. 4.87 cr. (FY23). While it posted steady growth in its top lines for the reported periods, it marked pressure on margins for FY23.

For the last three fiscals, APL has reported an average EPS of Rs. 5.37 and an average RoNW of 22.77%. The issue is priced at a P/BV of 2.54 based on its NAV of Rs. 27.54 as of March 31, 2023, and at a P/BV of 1.80 based on its post-IPO NAV of Rs. 38.81 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 15.66. Thus on the basis of its current earnings, the issue appears fully priced.

DIVIDEND POLICY:

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

COMPARISON WITH LISTED PEERS:

As per the offer document, the company has shown Tide Water Oil, and GP Petroleums as their listed peers. They are trading at a P/E of 23.85, and 13.44 (as of September 22, 2023). However, they are not comparable on an apple-to-apple basis.

MERCHANT BANKER’S TRACK RECORD:

This is the 30th mandate from Hem Securities in the last three fiscals (including the ongoing one). Out of the last 10 listings, all are listed with premiums ranging from 1.82% to 90% on the date of listing.

Conclusion / Investment Strategy

The company is operating in a highly competitive and fragmented market. It has posted steady growth in its top lines for the reported periods and over 10% PAT margins for the last two fiscals. Based on FY23 earnings, the issue appears fully priced. The company could have opted for a market lot of 1600 shares which could have helped them in a somewhat higher number of shareholders post IPO. A lot of 1600 could have been an investor-friendly gesture. Well-informed investors may park moderate funds for the medium to long term.

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