Polysil Irrigation Systems Limited NSE SME IPO review (Avoid)

• PISL is an integrated player in drip irrigation/sprinkler etc.
• It marked fluctuating top and bottom lines for the reported periods.
• Super profits for 4.5M of FY24 raises eyebrows and concern over its sustainability.
• Based on FY24 annualized earnings, the issue appears aggressively priced.
• There is no harm in skipping this pricey bet.

ABOUT COMPANY:
Polysil Irrigation Systems Ltd. (PISL) is a fully integrated player within the drip irrigation and sprinkler irrigation sectors, with presence in micro irrigation industry. Its products are reckoned to meet high quality standards and brand is associated with providing value-based irrigation solutions to its end customers and are subject to BIS standards.

The Company is engaged in manufacturing and sale of HDPE pipes, fittings and micro irrigation systems, such as drip irrigation system and sprinkler irrigation system, its components, accessories and allied products. As a manufacturer and seller of drip and sprinkler irrigation system its product range includes HDPE Pipes, pipe fittings and irrigation equipment’s, including disc filters, screen filters, hydro-cyclone filters, sand filters (gravel), compression fittings, valves (electrical and mechanicals), fertilizer tanks, Digital Controllers, Pressure Gauges, etc. PISL sells these products under the brand “Polysil”.

The company sells products through institution markets and open market sale. Under the open market sale, it sells products through distributors and dealers, who then resell the products to customers i.e. farmers. As of August 15, 2023, it sold products through 9 distributors and around 434 dealers in India. Its end customers are eligible to receive government subsidy, the process for disbursal of such subsidy is managed by distributor / dealers and/or customers. The company operates in the state of Gujarat, Tamil Nadu, Maharashtra, Andhra Pradesh, Karnataka, Madhya Pradesh, Uttar Pradesh, Rajasthan and Haryana. It operates in the State of Maharashtra, Madhya Pradesh and Rajasthan through its dealer / distributor network and in the State of Andhra Pradesh, Gujarat, Tamil Nadu, Haryana and Uttar Pradesh under institutional model. As of December 31, 2023, it had 52 employees on its payroll and also deploys contract workers as and when needed.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden combo IPO of 3228000 equity shares of Rs. 10 each at a fixed price of Rs. 54 per share to mobilize Rs 17.43 cr. The issue consists fresh equity issue worth Rs. cr. 7.80 cr. (1444000 equity shares) and an Offer for Sale L (OFS) of Rs. 9.63 cr. (1784000 shares).

The issue has already opened for subscription on February 08, 2024, and will close on February 13, 2024. 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 28.46% of the post-IPO paid-up capital of the company. The company is spending Rs. 1.74 cr. for this IPO process (fresh equity issue) and from the net proceeds of the fresh equity issue, it will utilize Rs. 5.00 cr. for working capital, and Rs. 1.06 cr. for general corporate purposes. There appears to be some mismatch as the prospectus shows dilution of 24.59%, which is wrong.

The issue is solely lead managed by Fedex Securities Pvt. Ltd., and Bigshare Services Pvt. Ltd. is the registrar of the issue. Market-Hub Stock Broking Pvt. Ltd. is the market maker for the company. While Fedex Securities has underwritten 15.06% of the issue, 84.96% is underwritten by Pure Broking Pvt. Ltd.

After having issued initial equity capital at par, it issued further equity capital in the price range of Rs. 307.50 – Rs. 317.40 per share (based on Rs. 10 face value) between March 2021 and October 2022. It has also given bonus shares in the ratio of 20 for 1 in February 2023. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 13.92, and Rs. 14.51 per share

Post-IPO, company’s current paid-up equity capital of Rs. 9.90 cr. will stand enhanced to Rs. 11.34 cr. With the IPO pricing, the company is looking for a market cap of Rs. 61.24 cr.

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has posted a total revenue/net profit of Rs. 54.72 cr. / Rs. 0.65 cr. (FY21), Rs. 37.67 cr. / Rs. 0.34 cr. (FY22), and Rs. 43.93 cr. / Rs. 1.14 cr. (FY23). For 4.5M of FY24 ended on August 15, 2023, it earns a net profit of Rs. 1.10 cr. on a total income of Rs. 10.20 cr. At the end of 1st day, it got just 0.87 times subscription.

Thus its top and bottom lines posted inconsistency and boosted profits for 4.5M of FY24 appears to be a window dressing to match the asking price.

For the last three fiscals, it has reported an average EPS of Rs. 0.80, and an average RONW of 5.32%. The issue is priced at a P/BV of 3.24 based on its NAV of Rs. 16.65 as of August 15, 2023, and at a P/BV of 2.53based on its post-IPO NAV of Rs. 21.32 per share.

If we attribute annualized FY24 super earnings to its post-IPO fully diluted paid-p capital, then the asking price is at a P/E of 20.85. Based on FY23 earnings, the issue is at a P/E of 54. Thus the issue appears aggressively priced.

For the reported periods, the company has posted volatile PAT margins of 1.19% (FY21), 0.90% (FY22), 2.59% (FY23), 6.70% (4.5M-FY24) and ROCE margins of 8.59%, 6.02%, 12.81%, 7.16% respectively, for the reported periods.

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 Captain Poly, RM Drip, Texmo Pipes, and Jain Irrigation as their listed peers. They are trading at a P/E of 20.03, 32.10, NA, and NA (as of February 08, 2024). However, they are not comparable on an apple-to-apple basis.

MERCHANT BANKER’S TRACK RECORD:
This is the 27th mandate from Fedex Securities in the last four fiscals, out of the last 10 listings, 2 opened at discount and the rest with premiums ranging from 6.49% to 76.19% on the date of listing.

Conclusion / Investment Strategy
The company is operating in a highly competitive and fragmented segment. It marked erratic top and bottom lines for the reported periods. Super earnings for 4.5M of FY24 not only raise eyebrows, but also major concern over its sustainability going forward. Based on FY24 annualized earnings, the issue appears aggressively priced. There is no harm in skipping this pricey bet.

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