Reetech Intl. BSE SME IPO review (May apply)

•    The company was originally established for the agricultural goods business 
  •    In 2020 it diversified into coal trading and changed its name to the current one.
  •    It posted super results for FY22, but it indicates window dressing of pre-IPO year.
  •    Based on FY22 earnings, the issue appears reasonably priced. 
  •    Sustainability of such margins going forward raises concern.
  •    Cash surplus/risk seeker may consider an investment with a long-term perspective. 

ABOUT COMPANY:
Reetech International Cargo & Courier Ltd. (RICCL) was started for business in agriculture goods such as Rice Milling, Dal Milling, Dal Processing, etc. under the banner of M R Agriculture Pvt. Ltd. and continued till recently. In 2020 it ventured out into the trading of coal and changed its name to the current one.

The company procures coal from global markets including India and sells it to customers in the sectors like Power, Steel, Rolling, and other industries through railway, seaports, or road transport. As of the filing of this offer document, it had 8 employees on its payroll.

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its need for working capital (Rs. 4.55 cr.), and general corporate purposes (Rs. 1.51 cr.), RICCL is coming out with a maiden IPO of 1114800 equity shares of Rs. 10 each at a fixed price of Rs. 105.00 per share to mobilize Rs. 11.71 cr. The issue constitutes 597600 fresh equity shares and 517200 shares by an offer for sale (OFS). The issue opens for subscription on September 27, 2022, and will close on September 29, 2022. The minimum application is to be made for 1200 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. The issue constitutes 26.37% of the post-IPO paid-up equity capital of the company. RICCL is spending Rs. 0.37 cr. for this IPO process (including Rs. 0.22 cr. for fresh equity issues).

The issue is solely lead managed by Gretex Corporate Services Ltd., and Bigshare Services Pvt. Ltd. is the registrar to the issue. Gretex group’s Gretex Share Broking Pvt. Ltd. is the market maker for the company.

After issuing initial equity shares at par, the company issued further equity shares at Rs. 100 each in March 2009 and February 2012. It has also issued bonus shares in the ratio of 6 for 1 in August 2022. The average cost of acquisition of shares by the promoters is Rs. 0.22 and Rs. 2.91 per share.

Post this IPO, RICCL’s paid-up equity capital of Rs. 3.63 cr. will stand enhanced to Rs. 4.23 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 44.39 cr.

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, RICCL has (on a consolidated basis) reported a turnover/net profit of Rs. 0.19 cr. / Rs. 0.14 cr. (FY20), Rs. 18.42 cr. / Rs. 0.30 cr. (FY21), and Rs. 116.89 cr. / Rs. 4.17 cr. (FY22). Super performance in the pre-IPO year appears to be the window dressing to pave the way for IPO at a fancy price.

For the last three fiscals, RICCL has posted an average EPS of Rs. 6.09 and an average RoNW of 29.51%. The issue is priced at a P/BV of 0.68 based on its NAV of Rs. 154.51 as of March 31, 2022, and at a P/BV of 3.14 based on its post-IPO NAV of Rs. 33.40 per share. (It appears that the company has given this data on a pre-bonus issue basis which is nothing but an eyewash).

If we attribute FY22 super earnings on post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 10.64. Thus the issue appears reasonably priced, but the sustainability of such margins going forward raises concern.

COMPARISON WITH LISTED PEERS:
As per the offer documents, RICCL has shown Anmol India and Redington as their listed peers. They are currently quoting at a P/E of 11.33, and 11.47 (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 since incorporation. 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 12th mandate from Gretex Corporate in the last three fiscals (including the ongoing one). Out of the last 10 listings, 1 opened at discount and the rest with premiums ranging from 0.47% to 29.63% on the day of listing.

Conclusion / Investment Strategy

RICCL has diversified in a highly competitive and fragmented segment. The sustainability of margins reported for FY22 raises concern. Based on this performance, the issue appears reasonably priced. Post-IPO small equity base indicates longer gestation for migration. Cash surplus/risk seekers may consider an investment with a long-term perspective.

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