Graphisads NSE SME IPO review (May apply)

• GAL is an integrated marketing, advertising and communication agency.
• It marked growth in its top lines with static bottom lines for FY22 and FY23.
• Based on FY24 super annualized earnings, the issue appears aggressively priced.
• It is operating in a highly competitive segment.
• Well-informed investors may park moderate funds for the long term rewards.

ABOUT COMPANY:
Graphisads Ltd. (GAL) is integrated marketing, advertising and communications agency, providing 360 degree solutions to its wide array of clients. The Company is in the same industry for the past 35 years and is continuously expanding its business horizons with the moving trends across the world, reflecting its growing expertise in the marketing and advertising industry.

The company provides advertising services on the work orders received by Government sector, Private sector and Public sector entities. The Company neither outsource/sub-contracts the services provided to its clients nor does it have any contract with third party in this respect. It endeavors to maintain the quality of services, follow strict procedures to ensure quality, timely delivery and competitive prices. The company endeavors in going beyond just media, to understanding business needs of the brand and delivering complete communications solutions.

Wide area of scope of work being offered and provided by GAL to its clients make it one of the few agencies that can truly claim to be a fully integrated and independent in providing the marketing and communications solutions. It offers creative, marketing strategy, on ground & virtual activation capabilities, and design solutions that help clients in brand building. It provides high-end ecosystem and end-to-end ad-tech communication solutions platform for advertising media services consisting of Brand Strategy, Communication Strategy, Creative Services, Media Planning, Media Buying & Media Release services which covers advertisement modes such as Newspapers, Magazines, Radio and TV, Events & Exhibitions, Digital Media, Brochures Printing, and display of Outdoor Hoardings, Digital screens and street furniture In all such mediums of advertising “Creative” exists i.e.; all the services are given keeping in the necessity of being creative, so that Graphisads can deliver most compelling communications to grab attentions of the public at large. As of June 30, 2023, it had 92 employees on its payroll.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden IPO of 4812000 shares of Rs. 10 each at a fixed price of Rs. 111 per share. It mulls mobilizing Rs. 53.41 cr. The issue opens for subscription on November 30, 2023, and will close on December 05, 2023. The minimum application to be made is for 1200 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 26.33% of the post-IPO paid-up capital of the company.

GAL is spending Rs. 2.00 cr. for this IPO process, and from the net proceeds of the IPO funds, it will utilize Rs. 16.62 cr. for repayment of certain borrowings, Rs. 21.45 cr. for working capital, and Rs. 13.34 cr. for general corporate purposes. After reserving 242400 shares for the market maker, the company has allocated net portion of the IPO as not more than 50% to Retail Investors and not more than 50% for Non-Retail investors.

The issue is solely lead managed by First Overseas Capital Ltd. and KFin Technologies Ltd. is the registrar of the issue. Rikhav Securities Ltd. is the market maker for the company.

Having issued initial equity shares at par, the company allotted further equity shares in the price range of Rs. 50 – Rs. 100 per share between December 2004 and December 2022. It has also issued bonus shares in the ratio of 6 for 1 in March 2023. The average cost of acquisition of shares by the promoters is Rs. 2.25, Rs. 4.99, and Rs. 5.56 per share.

Post-IPO, GAL’s current paid-up equity capital of Rs. 13.47 cr. will stand enhanced to Rs. 18.28 cr. Based on the upper cap of IPO price band, the company is looking for a market cap of Rs. 202.87 cr.

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, GAL has (on a consolidated basis) posted a total revenue/net profit of Rs. 47.56 cr. / Rs. 0.56 cr. (FY21), Rs. 89.73 cr. / Rs. 5.58 cr. (FY22), and Rs. 99.05 cr. / Rs. 5.57 cr. (FY23). For H1 of FY24, it earned a net profit of Rs. 2.06 cr. on a total income of Rs. 26.02 cr.

For the last three fiscals, the company has reported an average EPS of Rs. 8.29 and an average RoNW of 7.75%. The issue is priced at a P/BV of 3.33 based on its NAV of Rs. 33.37 as of June 30, 2023, and at a P/BV of 2.81 based on its post-IPO NAV of Rs. 39.51 per share.

If we attribute consolidated super FY24 annualized earnings to post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 24.56. Thus the IPO appears aggressively priced. Its debt at Rs. 27 cr. as of June 30, 2023 raise concern.

For the reported periods of the offer document, it posted PAT margins of 1.17% (FY21), 6.22% (FY22), 5.62% (FY23), 7.93% (Q1-FY24), and RoCE margins of 4.02%, 13.12%, 14.69%, 4.53% respectively.

DIVIDEND POLICY:
The company has not declared any dividends since incorporation. 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 Crayons Advertising, Bright Outdoor, and Daps Advertising as their listed peers. They are trading at a P/E of 26.50, 82.37, and 6.50 (as of November 24, 2023). However, it is not comparable on an apple-to-apple basis.

 

MERCHANT BANKER’S TRACK RECORD:
This is the 21st mandate from First Overseas in the last three fiscals (including the ongoing one). Out of the last 10 listings, 1 listed at a discount, 1 at par and the rest listed at premiums ranging from 0.04% to 43.53% on the day of listing.

Conclusion / Investment Strategy
The company is in a highly competitive and fragmented segment. It posted static profits for FY22 and FY23 despite growth in its top lines. Based on FY24 annualized super profits, the issue appears aggressively priced. We are witnessing fancy for marketing and advertising segment companies. Well-informed investors may park moderate funds for long-term rewards.

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