Bonlon Ind BSE SME IPO review (Avoid)

•    BIL is engaged in metals, hospitality and civil construction activities.
•    It has inconsistent financial track records.
•    The company faces stiff competition in its entire field of operations.
•    LM is raising curtain with this offer after a gap of 20 months.
•    Though IPO pricing appears lucrative, there is no harm in giving it a miss.

ABOUT COMPANY:
Bonlon Industries Ltd. (BIL) that started its operations in the form of traders in copper rods and bars and also supervising the manufacturing unit of copper bars in Sri Lanka. It uses to do third party operations up to 2013, thereafter it started its own manufacturing unit and also merged three group entities to obtain synergy in the business model. Currently, it operates in metals, hotel business and civil constructions. Thus it has diverse activities.

However, the company's logo is not yet registered and is clashing with the group's interest. It operates from a rented room of a hotel owned by the group. All these segments are facing stiff competitions with the fragmented business model.

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its needs for working capital (Rs. 10.12 cr.), BIL is coming out with a maiden IPO of 3756000 shares of Rs. 10 each at a fixed price of Rs. 28 per share to mobilize Rs. 10.52 cr. The issue opens for subscription on 30.06.20 and will close on 03.07.20. 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 26.48% of the post issue paid-up capital of the company.

The issue is solely lead managed by Sarthi Capital Advisors Pvt. Ltd., while Bigshare Services Pvt. Ltd. is the registrar to the issue. Choice Equity Broking Pvt. Ltd. is acting as a market maker for this IPO. BIL is spending Rs. 0.40 cr. for this IPO process.  From the issue expenses point of view, this issue is fully structured with funding arrangements.

Post issue BIL's current paid-up equity capital of Rs. 10.43 cr. will stand enhanced to Rs. 14.18 cr. It mulls a market cap of Rs. 39.71 cr. post this issue.

Having issued initial equity at par, BIL has also issued/converted equity shares in the price range of Rs. 40.94 to Rs. 50 per share between March 2001 and August 2018. The average cost of acquisition of shares by the promoters is Rs. 23.08 per share.

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, on a consolidated basis, BIL has reported turnover/net profits of Rs. 238.81 cr. / Rs. - (1.23) cr. (FY17), Rs. 243.13 cr. / Rs. 0.28 cr. (FY18) and Rs. 217.44 cr. / Rs. 2.82 cr. (FY19). For the nine months period ended on 31.12.2019 of FY20, it has earned a net profit of Rs. 13.88 cr. on a turnover of Rs. 186.99 cr. The company has shown inconsistency in turnover/profits. A sudden boost in the bottom line for the last partial year is perhaps due to window dressing and raises concern.

For the last three fiscals, BIL has posted an average EPS of Rs. 1.52 and an average RoNW of 1.99%. The issue is priced at a P/BV of 0.62 based on its NAV of Rs. 45.05 as on 31.03.2019 and at a P/BV of 0.69 on the basis of post-issue NAV of Rs. 40.54.

But its recent higher earnings for nine months of FY20 raises concern on sustainability going forward. Based on FY19 earnings and current equity capital, the issue is priced at a P/E of around 7.39 and on a weighted average basis at a P/E of 18.42 as claimed. Based on these parameters issue appears highly-priced.

If we annualize latest super earnings and attribute it on fully diluted equity post issue, then asking price is at a P/E of 2.15 making it a lucrative offer.

As at 31.12.19, its trade receivables are Rs. 13.93 cr. while trade payables and other current liabilities are Rs. 76.85 cr. which indicates an alarming situation. BIL has not declared any dividend in any financial years so far.

COMPARISION WITH LISTED PEERS:
As per offer documents, BIL has shown Hisar Metal and Shalimar Wires as its listed peers. They are currently trading at a P/Es of around 7.02 and -3.40 (as on 26.06.2020). 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 43rd mandate from its stable since FY 2012-13. It opted for dormancy after its last SME IPO in September 2018. It is now raising curtain once again after a gap of nearly 20 months and that too in the current pandemic situation, which is most surprising. Out of the last 10 mandates listed one opened at discount, two at par and the rest opened with premiums ranging from 0.07% to 22.87% on the day of listings. Thus it has an average track record.