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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.
•    Based on its FY22 financial performance, the issue is fully priced. 
•    Poor track record of the group so far makes it a risky bet.
•    There is no harm in skipping this fully priced issue. 

ABOUT COMPANY:
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 records 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 Bunglows, Staff Quarters, Labour Quarters, Pump House, General Stores, Dairy Farm etc. It currently employs 1307 employees on its payroll (including 158 temporary employees).

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its need for refurbishing its existing tea plantations (Rs. 5.57 cr.), additional plant and machinery for existing plantations (Rs. 3.11 cr.), working capital (Rs. 2.83 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 September 27, 2022, and will close on September 30, 2022. 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.

The issue is solely lead managed by Finshore Management Services Ltd., and Cameo Corporate Services Ltd. is the registrar to the issue. Nikunj Stock Brokers Ltd. is the market maker for the company.

After issuing initial equity shares at par, the company converted further 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.

FINANCIAL PERFORMANCE:
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). Thus it marked inconsistency in the top line with growing margins.

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 1.87 based on its NAV of Rs. 13.94 as of March 31, 2022, and at a P/BV of 1.35 based on its post-IPO NAV of Rs. 19.33 per share.

If we attribute FY22 earnings on post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 29.55. Thus the issue is aggressively priced.

COMPARISON WITH LISTED PEERS:
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 87.61, 264.58, 37.44, and 70.96 (as of September 22, 2022).  However, they are not truly comparable on an apple-to-apple basis.

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 IPO, based on its financial performance and future prospects.

MERCHANT BANKER’S TRACK RECORD:
This is the 30th mandate from Finshore Management in the last five fiscals (including the ongoing one). Out of the last 10 listings, 2 opened at discount, 2 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 financial 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.

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