Karnika Ind. NSE SME IPO review (May apply)

• KIL is a third-party job work aggregator for kid’s wear marketing.
• Boosted bottom lines for FY22 and FY23 raise eyebrows.
• Based on FY23 earnings, the issue appears fully priced.
• Well-informed investors may park funds for long-term rewards.

ABOUT COMPANY:

Karnika Industries Ltd. (KIL) is an ISO 14001:2015 certified manufacturer through job work, trader, and exporter of garments. The company basically manufactures through job work all types of kids’ wear i.e., shorts, joggers, capri, tees, rompers, sleepsuits, pyjamas, winter wear, infant wear, etc. It has constructed well-established manufacturing units for designing, preparation of the sample, quality inspection, ironing, and packing of Garments that are equipped with all the necessary hi-tech machines and tools that are required for a modern manufacturing unit. Machinery that is equipped in its infrastructure is operated by a highly experienced team of professionals.

KIL manufactures the majority of products through job work and is capable of undertaking bulk requirements of clients and delivering within the stipulated time schedule. The company majorly focuses on high-quality fabrics and garments, delivering quality textiles and maintaining long-term association with clients. The level of advancement determines the productivity of machines and labor, which in turn, determines the production and profitability of the Company.

KIL sells products under the brand of KARNIKA and sub-category as KARNIKA Care, KARNIKA Cool, KARNIKA Cube, KARNIKA Life, KARNIKA Key, KARNIKA Club. It has a reputed client base which includes various reputed Commission Agents and retail sector clients. It is growing at a rapid pace and making its presence in the market with quality and professional work.

KIL is not just one of the leading manufacturers of kids’ clothing but has been organizing successful fashion shows as well. In the past, it had mesmerized audiences with unique collections and imaginative themes. Every event has been a testament to its commitment to providing the best in KIDS fashion and has been a showcase of creativity, quality, and attention to detail. As of March 31, 2023, it had 221 employees on its payroll.

ISSUE DETAILS/CAPITAL HISTORY:

The company is coming out with a maiden IPO of 3299200 equity shares of Rs. 10 each at a fixed price of Rs. 76 per share to mobilize Rs. 25.07 cr. The issue opens for subscription on September 29, 2023, and will close on October 05, 2023. The minimum application to be made is for 1600 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 26.61% of the post-IPO paid-up capital of the company. The company is spending Rs. 1.70 cr. for this IPO process and from the net proceeds, it will utilize Rs. 20.00 cr. for working capital, and Rs. 3.37 cr. for general corporate purposes.

Beeline Capital Advisors Pvt. Ltd. is the sole lead manager and Skyline Financial Services Pvt. Ltd. is the registrar of the issue. Beeline Group’s Spread X Securities Pvt. Ltd. is the market maker for the company

Having issued initial equity shares at par, the company issued further equity shares at a fixed price of Rs. 60 per share in October 2022. It has also issued bonus shares in the ratio of 1 for 1 in December 2022. The average cost of acquisition of shares by the promoters is Rs. 10.77 per share.

Post-IPO, KIL’s current paid-up equity capital of Rs. 9.10 cr. will stand enhanced to Rs. 12.40 cr. ased on the IPO pricing, the company is looking for a market cap of Rs. 94.24 cr.

FINANCIAL PERFORMANCE:

On the financial performance front, for the past three fiscals, the company has posted a total revenue/net profit of Rs. 47.79 cr. / Rs. 0.82 cr. (FY21), Rs. 98.93 cr. / Rs. 4.54 cr. (FY22), and Rs. 132.44 cr. / Rs. 8.52 cr. (FY23 -consisting of two broken periods).

For the last three fiscals, KIL has reported an average EPS of Rs. 9.66 and an average RoNW of 45.76%. The issue is priced at a P/BV of 1.04 based on its NAV of Rs. 19.85 as of March 31, 2023, and at a P/BV of 1.53 based on its post-IPO NAV of Rs. 44.50 per share.

If we attribute FY23 earnings to the post-IPO fully diluted paid-up equity capital of the company, then the asking price is at a P/E of 11.06.

DIVIDEND POLICY:

The company has not declared any dividends since its 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 S P Apparels, and Veekayem Fashion as their listed peers. They are trading at a P/E of 14.81, and 22.37 (as of September 27, 2023). However, they are not comparable on an apple-to-apple basis.

MERCHANT BANKER’S TRACK RECORD:

This is the 22nd mandate from Beeline Capital in the last three fiscals (including the ongoing one). Out of the last 10 listings, 1 opened at par and the rest listed with premiums ranging from 0.39% to 85.71% on the date of listing.

Conclusion / Investment Strategy

The company is engaged in the trading and marketing of kids’ wear that is procured on a job-work basis from a third party. It marked growth in its top lines, but the bottom got boosted for FY22 and FY23, which raised eyebrows. Based on FY23 earnings, the issue appears fully priced. Well-informed investors may park funds for long-term rewards.

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