Aaron Industries NSE SME IPO review (Avoid)

•    Company’s financial performance was average for FY15-17.
•     Posted spectacular results for FY18. Will it sustain?
•    Over 2.5 times paid up equity post issue.
•    Issue is fully priced.
•     Average track record of merchant banker.

About Company:
Aaron Industries Ltd. (AIL) is a MOTI group company that started as elevator cabins designing company and also introduces products like cable tray and building hardware materials such as Z perlins, slotted channels, busbar chambers, distribution boxes, loom switches etc. It also ventured into manufacturing and trading in elevator products, parts and thus became under one roof supplier for these products.

Capital History/Issue details:
To part finance its plans for set up of new line of business, working capital and general corpus fund needs,  AIL is coming out with a maiden IPO of 1257000 equity shares of Rs. 10 each at a fixed price of Rs. 38 per share to mobilize Rs. 4.78 crore. Issue opens for subscription on 20.08.18 and will close on 24.08.18. Minimum application is to be made for 3000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. Issue constitutes 26.28% of post issue paid up capital of the company. Issue is solely lead managed by Gretex Corporate Services Pvt. Ltd. and Bigshare Services Pvt. Ltd. is the registrar to the issue. Having issued initial equity at par, it raised further equity at a price of Rs. 11 to Rs.17 per share between February 2016 and January 2018. It has also issued bonus shares in the ratio of 4 for 1 in July 2015, 1 for 2 in July 2017 and 7 for 8 in June 2018. Post issue, its current paid up equity capital of Rs. 3.53 cr. will stand enhanced to Rs. 4.78 cr. Average cost of acquisition of shares by the promoters is Rs. 4.72, Rs. 6.23, Rs. 6.36, Rs. 6.87, Rs. 7.29 and Rs. 8.57 per share.

Financial performance:
On performance front, for last four fiscals AIL posted turnover/net profits of 2.38 cr. / Rs. 0.04 cr. (FY15), Rs. 3.32 cr. / Rs. 0.04 cr. (FY16), Rs. 4.80 cr. / Rs. 0.05 cr. (FY17) and Rs. 11.79 cr. / Rs. 1.07 cr. Thus it has shown spectacular performance for FY18 which is a bit surprising. For last three fiscals, it has posted an average EPS of Rs. 6.24 and an average RoNW of 23.41% on the basis of paid up equity capital of Rs. 1.88 cr. as on 31.03.18. Issue is priced at a P/BV of 2.01 on the basis of its NAV of Rs. 18.94 as on 31.03.18. It has no listed peers to compare with. If we take latest earnings and attribute it to fully diluted equity post issue, then asking price is at a P/E of around 16 plus thus it appears fully priced. Sustainability of its FY18 performance in the year before IPO raises concern.

Merchant banker’s track record:
On merchant banker’s front, this is 13th mandate from its table in last three years. Out of last 10 listings, 1 opened at discount, 4 at par and the rest with a premium ranging from 1.92% to 8% on the day of listings. Thus it has average track record.