Swastik Pipe NSE SME IPO review

•    SPL is one of the oldest steel pipe/tubes manufacturer in India. 
•    It marked a loss for FY19 and thereafter it has earned some profits.
•    FY22 super earnings include Rs. 15.64 cr. of exceptional items.
•    Despite book building route IPO, it has not marked any quota for QIBs.
•    There is no harm in skipping this aggressively priced issue. 

PREFACE:
Though this IPO is via book building route and it posted a loss for FY20, it should have earmarked 75% for QIBs, but the company has not allocated any portion for QIBs, and the net issue post market maker portion is allocated at 50% for HNIs and 50% for Retail investors (refer IPO ad). This is really surprising. How these kinds of norms are accepted by the exchanges is a matter of concern. Considering its current paid-up equity capital, it should have gone for a mainboard IPO for a direct listing. Its plans for SME IPO raise eyebrows. There are many typo errors in the offer documents. According to management, just to save the mainboard issue expenses, they selected the SME IPO route as per the merchant banker’s advice, being a small IPO.

ABOUT COMPANY:
Swastik Pipe Ltd. (SPL) is the manufacturer and exporter of Mild Steel/Carbon Steel ERW Black and Galvanized Pipes, Hallow Steel Pipe, Cold Rolled Steel (CR) Strips/ Coils, Swaged Tubular Poles, Solar Structure and Steel Structures. The Company uses raw materials of premium quality i.e. prime steel from SAIL – Steel Authority of India Limited, Tata Steel Limited and high purity zinc sourced from Hindustan Zinc Limited, which makes it comfortable to supply the quality material all over the world.
At present, it has highly sophisticated and technically competent plants that are located at Bahadurgarh, Distt. Jhajjar, Haryana (Unit no.1) and at Kotwan, Kosi Kalan, Distt. Mathura, Uttar Pradesh (Unit No. 2) with a combined installed capacity of 2,44,001 MT as of the date of this Red Herring Prospectus. SPL has diversified its Manufacturing activities towards the production of Solar Module Mounting Structures, Transmission Towers, Steel Tubular Poles, and Solar Poles Special structures for Railways, Scaffolding, Formwork, and crash barriers.
SPL is one of the oldest manufacturers, exporters, and suppliers of steel pipes and tubes to various heavy engineering industries in India. Steel pipes and tubes can be used for many purposes such as for frames and shafts, bicycle frames, furniture, CDW pipes for shockers, steel pipes for various structural purposes, various engineering purposes, etc. The company has a very wide range of steel pipes and tube products. The lengths of the steel pipes & tubes range from 4m to 7m unless otherwise specified by the customers. SPL manufactures steel pipes and tubes in various shapes and sizes such as square, round, rectangular and elliptical or any special shape. As of September 16, 2022, it had 376 employees on its payroll.

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its need for working capital (Rs. 50.00 cr.), and general corporate purposes, SPL is coming out with a maiden IPO of 6252000 equity shares of Rs. 10 each via book building route with a price band of Rs. 97 to Rs. 100 per share to mobilize Rs. 62.52 cr. (at the upper cap). The issue opens for subscription on September 29, 2022, and will close on October 03, 2022. The minimum application is to be made for 1200 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 26.91% of the post-issue paid-up capital of the company.
The issue is solely lead managed by Corporate CapitalVentures Pvt. Ltd and Skyline Financial Services Pvt. Ltd. is the registrar to the issue. SS Corporate Securities Ltd. is the market maker for this IPO.
Having issued initial equity shares at par, the company issued/converted further equity shares in the price range of Rs. 69.00 to Rs. 92.60 per share (on the basis of Rs. 10 FV) between March 2013 and January 2022. It has also issued bonus shares in the ratio of 1 for 5 in March 2022. The average cost of acquisition of shares by the promoters is Rs. 8.33, Rs. 9.57, Rs. 25.57, and Rs. 62.11 per share.
Post-IPO, SPL’s current paid-up equity capital of Rs. 16.98 cr. (16979460 shares) will stand enhanced to Rs. 23.23 cr. (23231460 shares).  Based on the IPO pricing, the company is looking for a market cap of Rs. 232.32 cr. (at the upper cap).

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, SPL has posted a turnover/net profit – (loss) of Rs. 658.07 cr. / Rs. – (13.89) cr. (FY20), Rs. 523.84 cr. / Rs. 1.49 cr. (FY21), and Rs. 612.20 cr. / Rs. 20.41 cr. (FY22). The company has incurred a loss for FY20. FY22 profit includes Rs. 15.64 cr. of exceptional items.
For the last three fiscals, SPL has reported an average EPS of Rs. 5.44 and an average RoNW of 4.91 %. The issue is priced at a P/BV of 1.20 based on its NAV of Rs. 83.45 as of March 31, 2022, and at a P/BV of 1.14 based on its post-IPO NAV of Rs. 88.00 per share. (at the upper price band).
If we attribute FY22 earnings (including exceptional items) on post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 11.38. If we ignore the exceptional items, then the asking price is at a P/E of 48.78. Thus this issue is aggressively priced.

DIVIDEND POLICY:
The company has not declared/paid any dividend for any financial year. It will adopt a prudent dividend policy post listing, based on its financial performance and future prospects.

COMPARISON WITH LISTED PEERS:
As per offer documents, SPL has shown Rama Steel, Hi-Tech Pipes, Hariom Pipes, APL Apollo, Venus Pipes, and Good Luck India as their listed peers. They are currently trading at a P/E of 110.79, 27.53, 18.14, 90.29, 33.18, and 15.68 (as of September 23, 2022). However, they are not truly comparable on an apple-to-apple basis.

MERCHANT BANKER’S TRACK RECORD:
This is the 11th mandate from Corporate CapitalVenture in the last six fiscals (including the ongoing one). Out of the last 9 listings, 2 opened at discount and the rest with premiums ranging from 0.06% to 34.62% on the day of listing.

Conclusion / Investment Strategy
Though the company is eligible for mainboard IPO, it has opted for the SME route which is raising eyebrows. It marked a loss for FY20 and super profits for FY22 with the help of exceptional items. Based on FY22 performance excluding exceptional items, the issue is aggressively priced. It is operating in a highly competitive segment and hence sustainability of margins is a major concern. There is no harm in skipping this aggressively priced IPO.

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