Chaman Metallics NSE SME IPO review (Apply)

•    CML is engaged in the manufacturing and marketing of sponge iron.
•    Post the change in management, it flourished well.
•    It has posted steady growth in its top and bottom lines for the reported periods. 
•    Based on FY23 annualized earnings, the issue is lucratively priced. 
•    Investors may consider an investment with a medium to long-term perspective. 

ABOUT COMPANY:
Chaman Metallics Ltd. (CML) is primarily engaged in the business of manufacturing and selling Direct Reduced Iron (i.e. sponge iron). Sponge iron is mainly used as a raw material for making steel in electric arc furnaces and induction furnaces. Through its sponge iron business, the company caters to the metallic requirements of steel producers in selected geographies. 

CML was under the control of MSP Group from 2006 to 2019. In 2019, the Company was acquired by Raipur-based GR Group which is in the steel business since 1996. Its business operations are organized synergistically, and the company derives benefits after its acquisition by GR Group, which operates in
various segments of steel i.e. Ferro alloys, Sponge Iron, MS Ingots, and re-rolled products.

CML's manufacturing unit is based in Chandrapur, Maharashtra, and is spread across an area of around 63 acres of land. At the sponge iron manufacturing facility, it operates two Rotary kilns having an aggregate annual installed capacity of 72,000 MT (2 X 100 MTPD) for the production of sponge iron as of September 30, 2022. The strategic location of the sponge iron manufacturing facility aids access to high-quality iron ore, iron ore pellets, coal, and dolomite which are the major raw materials for sponge iron manufacturing. During the production of sponge iron, solid waste is produced as a by-product called dolochar.

CML is a customer-centric Company, constantly striving to create value for its customers through quality products offered and committed deliveries. Currently, it sells products primarily in the state of Maharashtra, Odisha, and Chhattisgarh. Some of its customers include Rajesh Steel & Wire Industries (New), R.K. Steel Sales, SMW Ispat Pvt. Ltd, Gajkesari Steels & Alloys Pvt. Ltd., etc.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden IPO of 6372000 equity shares of Rs. 10 each at a fixed price of Rs. 38 per share to mobilize Rs. 24.21 cr. The issue is opening for subscription on January 04, 2023, and will close on January 06, 2023. 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 36.40% of the post-issue paid-up capital of the company. CML is spending Rs. 1.94 cr. for this IPO process. From the residual funds, it will utilize Rs. 16.50 cr. for the working capital and Rs. 5.77 cr. for general corporate purposes. 

Hem Securities Ltd. is the sole lead manager for the issue and Link Intime India Pvt. Ltd. is the registrar of the issue. Hem Finlease Pvt. Ltd. is the market maker for the company. 

Having issued initial equity capital at par value, the company issued further equity shares in the price range of Rs. 31 - Rs. 200 between March 2005 - September 2016. It has also issued bonus shares in the ratio of 5 for 4 in August 2022. The average cost of acquisition of shares by the promoters is Rs. 11.54 per share. 

Post-IPO, CML's current paid-up equity capital of Rs. 17.76 cr. will stand enhanced to Rs. 24.14 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 91.71 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, CML has posted a turnover/net profit of Rs. 58.37 cr. / Rs. 3.69 cr. (FY20), Rs. 140.76 cr. / Rs. 5.23 cr. (FY21), and Rs. 185.46 cr. / Rs. 9.35 cr. (FY22). For the H1 of FY23, it earned a net profit of Rs. 6.82 cr. on a turnover of Rs. 111.82 cr. CML has marked growth in its top and bottom lines for all these periods. 

For the last three fiscals, CML has reported an average EPS of Rs. 3.96 and an average RoNW of 20.96%. The issue is priced at a P/BV of 1.51 based on its NAV of Rs. 25.18 as of September 30, 2022, and at a P/BV of 1.33 based on its post-issue NAV of Rs. 28.57 per share. 

If we annualize FY23 earnings and attribute it to the post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 6.73. Thus the issue is lucratively priced. 

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 offer documents, CML has shown Bihar Sponge and Lloyds Metal as their listed peers. They are currently trading at a P/E of 13.60 and - (15.80) (as of January 02, 2023). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
This is the 19th 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 166.67% on the day of listing.