Arihant Academy NSE SME IPO review (May apply)

•    The company is engaged in providing coaching services in the western suburbs.
•    Growth in its bottom lines on a static top line for the last 18 months raises eyebrows.
•    Based on its financial data, the issue appears fully priced. 
•    Well-informed, cash surplus risk seekers may consider parking funds for the long term. 

ABOUT COMPANY:
Arihant Academy Ltd. (AAL) is engaged in providing coaching services and parallel educational support vertical in the western suburbs of Mumbai, Maharashtra for Class 8, 9, and 10 for both the State Board and ICSE Board; Class 11 and 12 for commerce and science section; tutoring students in the science field for entrance exams such as JEE (Main), JEE (Advanced) and MHT- CET (State level), NEET (National Level), MHT- CET (State Level, Maharashtra) and preparing students for professional exams such as CS and CA for the entry-level and second level exam, in the commerce section. 

AAL offers a hybrid model of teaching services through classroom-based coaching under the traditional Chalk & Talk concept and digital and distance learning, which supplements classroom courses and allows students to engage in self-paced learning. The company operates under the brand name "Arihant Academy". Currently, it has 14 coaching centers in the western suburbs and is coaching around 6000 students. As of September 30, 2022, it has 155 faculty members. The company intends to expand its Tier II and Tier III cities with franchise arrangements.  

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its need for working capital (Rs. 11.00 cr.), and general corporate purposes (Rs. 2.72 cr.), AAL is coming out with a maiden IPO of 1635200 equity shares of Rs. 10 each at a fixed price of Rs. 90 per share to mobilize Rs. 14.72 cr. The issue is opening on December 16, 2022, and will close on December 21, 2022. The minimum application is to be made for 1600 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 27% of the post-issue paid-up capital of the company. AAL is spending Rs. 1.00 cr. for this IPO process. 

Shreni Shares Pvt. Ltd. is the sole lead manager for this IPO, and Bigshare Services Pvt. Ltd. is the registrar of the issue. Shreni Shares Pvt. Ltd. is also the market maker for the company. 

AAL has issued initial equity shares at par value and has also issued bonus shares in the ratio of 441 shares for 1 share held in August 2022. The average cost of acquisition of shares by the promoters is Rs. 4.23, and Rs. 4.38 per share. 

Post-IPO, AAL's current paid-up equity capital of Rs. 4.42 cr. will stand enhanced to Rs. 6.06 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 54.50 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, AAL has posted a turnover/net profit of Rs. 19.21 cr. / Rs. 0.42 cr. (FY20), Rs. 14.10 cr. / Rs. 1.13 cr. (FY21), and Rs. 15.32 cr. / Rs. 2.02 cr. (FY22). For H1 of FY23, it earned a net profit of Rs. 1.42 cr. on a turnover of Rs. 13.01 cr. Thus, a sudden jump in its bottom lines for the last 18 months raises eyebrows. 

For the last three fiscals, AAL has reported an average EPS of Rs. 3.29 and an average RoNW of 37.33%. The issue is priced at a P/BV of 6.26 based on its NAV of Rs. 14.38 as of September 30, 2022, and at a P/BV of 2.71 based on its post-IPO NAV of Rs. 33.16 per share. 

If we annualize FY23 earnings and attribute it to the post-IPO fully diluted equity capital, then the asking price is at a P/E of around 19.11. Thus the issue appears fully priced. 

DIVIDEND POLICY:
The company has not paid any dividends since its 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, AAL has shown CL Educate and Veranda Learning as their listed peers. They are currently trading at a P/E of 21.57, and 00 (as of December xx, 2022 - BSE Website). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
This is the 17th mandate from Shreni Shares in the last three fiscals (including the ongoing one). Out of the last 10 listings, all opened at premiums ranging from 0.56% to 101.18% on the day of listing.