Baheti Recycling NSE SME IPO review (Apply)

•    BRIL is an aluminium recycling company catering to various industries. 
•    After average trends for the previous two fiscals, it posted bumper results for FY22 which raises concern. 
•    Based on its FY23 earnings, the issue appears reasonably priced. 
•    Aluminium industry is gaining ground hinting at bright prospects for BRIL.
•    Investment may be considered for medium to long-term rewards. 

ABOUT COMPANY:
Baheti Recycling Industries Ltd. (BRIL) is an aluminium recycling Company, primarily engaged in processing aluminium-based metal scrap to manufacture (i) aluminium alloys in the form of ingots and (ii) aluminium de-ox alloys in the form of cubes, ingots, shots and notch bar. The versatile properties of aluminium and its alloys result in it being used in various industries, which include automobiles, construction, electrical transmission application, food packaging etc. Aluminium alloys are used in automobile components due to their stiffness, corrosion resistance and excellent strength-to-weight ratio. The Aluminium de-ox alloys are used as deoxidizers in steel manufacturing units.

Aluminium is more environment-friendly than steel, plastic and other materials. It has widespread uses throughout the economy and is equally important to both the industrial and consumer sectors. Key sectors to drive aluminium consumption in India are Auto, Power, Electronics, Railways, Aerospace & Defence Construction, Solar Energy and Aluminium packaging. Aluminium is 100% recyclable and consumes 95% less energy and releases 95% less greenhouse gases as compared to primary aluminium and there is no loss of properties or quality during the recycling process. (Source: Indian Bureau of Mines).

As of the date of this Prospectus, its manufacturing unit, situated at Dehgam (Gandhinagar, Gujarat) has a 12,000 MT installed capacity for processing aluminium scrap. The unit has a well-equipped laboratory, modern technology and testing equipment with a supportive environment and facilities, to ensure that the products conform with the pre-determined standards. Its manufacturing facility is strategically located near some of its customers' manufacturing facilities allowing it to optimize deliveries, reduce lead times and facilitate greater interaction with customers.

BRIL is also engaged in trading scrap materials such as aluminium scrap, brass scrap, copper scrap, zinc scrap etc. As of October 31, 2022, the company has 275 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its needs for modernization and expansion of existing manufacturing unit (Rs. 2.55 cr.), working capital (Rs. 7.00 cr.), and general corporate purpose (Rs. 1.90 cr.), BRIL is coming out with a maiden IPO of 2760000 equity shares of Rs. 10 each at a fixed price of Rs. 45 per share to mobilize Rs. 12.42 cr. The issue opens for subscription on November 28, 2022, and will close on November 30, 2022. The minimum application to be made is for 3000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 26.62% of the post-issue paid-up capital of the company. BRIL is spending Rs. 0.97 cr. for this IPO process. 

The sole lead manager to this issue is Hem Securities Ltd., and Purva Sharegistry (India) Pvt. Ltd. is the registrar of the issue. Hem Finlease Pvt. Ltd. is the market maker for the company. 

The company has issued/converted most of its equity at par and has also issued bonus shares in the ratio of 1 for 4 in February 2000, and 2 for 3 in June 2022. The average cost of acquisition of shares by the promoters is Rs. 1.07, Rs. 1.94, and Rs.4.28 per share. 

Post-IPO, BRIL's current paid-up equity capital of Rs. 7.61 cr. will stand enhanced to Rs. 10.37 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 46.66 cr.

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, BRIL has posted turnover/net profits of Rs. 105.96 cr. / Rs. 0.19 cr. (FY20), Rs. 127.80 cr. / Rs. 0.48 cr. (FY21), and Rs. 249.26 cr. / Rs. 2.92 cr. (FY22). Thus sudden jump in the bottom line in the pre-IPO year raises concern. For the first two months of FY22 ended on May 31, 2022, it earned a net profit of Rs. 0.57 cr. on a turnover of Rs. 57.57 cr. Thus it has posted super results for the last 14 months of working. 

For the last three fiscals, BRIL has reported an average EPS of Rs. 2.22 and an average RoNW of 10.53%. The issue is priced at a P/BV of 1.98 based on its NAV of Rs. 22.70 as of May 31, 2022, and at a P/BV of 1.57 based on its post-IPO NAV of Rs. 28.63. 

If we annualize FY23 earnings and attribute it to post-IPO fully diluted equity capital, then the asking price is at a P/E of around 13.55. 

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

COMPARISON WITH LISTED PEERS:
As per the offer document, BRIL has shown Arfin India and Nupur Recyclers as their listed peers. They are currently quoting at a P/E of 35 and 50.63 (as of November 23, 2022). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
This is the 18th mandate from Hem Securities in the last three fiscals (including the ongoing one). Out of the last 10 listings, all opened with premiums ranging from 1.47% to 104.87% on the day of listing.