Anand Rayons BSE SME IPO review (Avoid)

•    ARL is engaged in trading of a variety of textile yarns.
•    The segment has high volume-low margins and cut-throat competition.
•    The issue is priced aggressively.
•    Merchant Banker has a topsy-turvy background.
 ABOUT COMPANY:
Anand Rayons Ltd.  (ARL) is trading in a variety of textile yarns and has dealership of Reliance Industries, JCT Ltd., Indorama Synthetics, Garden Silk Mills, Filatex etc. Initially, it was selling products in and around Surat only, but now it is supplying products to cities like Ahmedabad, Varanasi, Ichalkaranji, Bangaluru, Erode, Coimbatore etc. Currently, it is doing job work in a spinning unit under Job work agreement.  The company operates in a highly competitive field and the business has high volumes –low margins.
 
ISSUE DETAILS/CAPITAL HISTORY:
To part finance its plans of generating working capital (Rs. 8.75 cr.), General corpus fund (Rs. 3.16 cr.), ARL is coming out with a maiden IPO of 4688000 equity shares of Rs. 10 each at a fixed price of Rs. 27 per share to mobilize Rs. 12.66 Cr. ARL is spending Rs. 0.75 cr. for the process of this IPO. The issue opens for subscription on 18.06.19 and will close on 24.06.19. Minimum application is to be made for 4000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. Issue constitutes 31.29% of the post issue paid up capital of the company. The issue is solely lead managed by Guiness Corporate Advisors Pvt. Ltd. and Bigshare Services Pvt. Ltd. is the registrar to the issue. Basan Equity Broking Ltd. (from Hyderabad)  is acting as a market maker for this issue.
 
The company has issued all shares at par against consideration for the takeover of the partnership business of the group.  The average cost of acquisition of shares by the promoters is Rs. 10 per share. Post issue ARL's current paid up equity capital of Rs. 10.30 cr. will stand enhanced to Rs. 14.98 cr.
 
FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, ARL has posted turnover/net profits of Rs. 219.92 cr. / Rs. 0.46 cr. (FY16), Rs. 270.62 cr. / Rs. 1.05 cr. (FY17) and Rs. 259.59 cr. / Rs. 1.45 cr. (FY18). For the first ten months ended on 31.01.19 of FY19, it has posted a net profit of Rs. 1.72 cr. on a turnover of Rs. 231.76 cr. Thus its top line has almost remained static since FY17.
 
For the last three fiscals, ARL has posted an average EPS of Rs. 1.67 and an average RoNW of 13.57%. The issue is priced at a P/BV of 2.23 on the basis of its NAV of Rs. 12.11 as on 31.03.18 and at a P/BV of 1.61 on the basis of post issue NAV of Rs. 16.77. If we annualize latest earnings and attribute it on fully diluted equity post issue then asking price is at a P/E of around 20, thus it is priced aggressively.

COMPARISION WITH LISTED PEERS:
As per offer documents it has shown Shiva Texyarn and Jakharia Fabrics as its listed peers that are currently trading at a P/Es of around 25 and 21 (as on 13.06.19).However, they are not strictly comparable on an apple to apple basis.
 
MERCHANT BANKER'S TRACK RECORD:
On merchant banker's front, this is the 29th mandate from its stable in last three fiscals. Out of last 10 listings, 1 opened at discount and the rest with premiums ranging from 0.013% to 28.72% on the day of listing.  It is worthwhile to mention that this is the merchant banker that brought the highly oversubscribed IPO of Jhandewalas Foods (278 times oversubscription) and the biggest primary SME IPO of MMP Industries (Rs. 85 cr.) But at the same time, it suffered suspension in the recent past and once again some of the group companies are under suspension currently. Many of its mandates are faring poorly on the bourses at present.