Arrowhead Seperation BSE SME IPO review (Avoid)

•    ASEL is in the business of design and manufacturing of various chemical process equipments.
•    It has posted steady growth in its top lines for the reported periods. 
•    The sudden jump in bottom lines for the last 15 months raises eyebrows. 
•    Based on its super FY24 annualized earnings the issue appears aggressively priced. 
•    There is no harm in skipping this pricey bet. 

ABOUT COMPANY:
Arrowhead Seperation Engineering Ltd. (ASEL) is engaged in design and manufacture of various chemical process Equipments with specialization in continuous drying and cooling system equipment. The company has a vision to develop Equipments and provide solution which matches with the global standard. 

The company conducts pilot trials on client's material to arrive at suitable drying solution for their application. ASEL is in dryer manufacturing business for more than two decades now and its team with its experience has been instrumental in driving growth and business strategies of the Company. It has been continuously focusing on upgrading itself with better designs and team to be able to cater the needs of client and provide them with quality equipment.

It has on-payroll employee strength of 54 persons as on June 30, 2023 and the company also employ industry professionals for project specific works on professional basis from time to time.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden IPO of 558000 equity shares of Rs. 10 each at a fixed price of Rs. 233.00 per share to mobilize Rs. 13.00 cr. The issue opens for subscription on November 16, 2023, and will close on November 20, 2023. The minimum application to be made is for 600 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. The issue constitutes 29.82% of the post-IPO paid-up equity capital of the company. ASEL is spending Rs. 1.30 cr. for this IPO and from the net proceeds, it will utilize Rs. 2.00 cr. for repayment of loan from NBFC, Rs. 6.50 cr. for working capital, and Rs. 3.20 cr. for general corporate purposes.  

Aryaman Financial Services Ltd. is the sole lead manager and Cameo Corporate Services Ltd. is the registrar of the issue. Aryaman group's Aryaman Capital Markets Ltd. is the market maker for the company. 

Having issued initial equity shares at par, the company issued further equity shares at a price of Rs. 13.30 per share in May 1996 and January 1997 (on the basis of FV of Rs. 10 each), and has also issued bonus shares in the ratio of 625 shares for every 1000 shares. The average cost of acquisition of shares by the promoters is Rs. 6.15 per share. 

ASEL's current paid-up equity capital of Rs. 1.31 cr. will stand enhanced to Rs. 1.87 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 43.60 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has posted a total revenue/net profit/- (loss) of Rs.9.17 cr. / Rs. - (1.79) cr. (FY21), Rs. 10.92 cr. / Rs. 0.09 cr. (FY22), and Rs. 21.72 cr. / Rs. 1.69 cr. (FY23). For Q1 of FY24 ended on June 30, 2023, it earned a net profit of Rs. 0.64 cr. on a total revenue of Rs. 8.82 cr. 

For the last three fiscals, the company has reported an average EPS of Rs. 4.40, and an average RoNW of - (5.53) %. The issue is priced at a P/BV of 9.77 based on its NAV of Rs. 23.84 as of June 30, 2023, and at a P/BV of 2.71 based on its post-IPO NAV of Rs. 86.06 per share. 

If we attribute annualized super earnings of FY24 on post-IPO fully diluted paid-up equity capital of the company, then the asking price is at a P/E of 16.95. Based on FY23 earnings, the post-IPO P/E stands at 25.77. Thus the issue appears aggressively priced.

For the reported periods of its financial performances, the company has posted PAT margins of - (19.64) % (FY21), 0.84 % (FY22), 7.87% (FY23), and 7.38% (Q1-FY24), and RoCE margins of - (7.55) %, 13.17 %, 30.94 %, and 37.39 % respectively for corresponding periods.  

DIVIDEND POLICY:
The company has not declared any dividends for any reported financial years. It will adopt a prudent dividend policy based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per the offer document the company has shown Kilburn Engg, and Praj Ind., as their listed peers. They are trading at a P/E of 27.28, and 39.12 (as of November 10, 2023). However, they are not comparable on an apple-to-apple basis. 

"Aho ashcharyam", while giving industry P/E data, the company has shown Yuken India and TRF Ltd. while as peers it is showing Kilburn Engg., and Praj Ind. 

MERCHANT BANKER'S TRACK RECORD:
This is the 22nd mandate from Aryaman Financial in the last four fiscals (including the ongoing one). From the last 10 listings, 1 opened at discount, 2 at par and the rest with premiums ranging from 1.48 % to 31.15 % on the day of listing.