City Crop Agro BSE SME IPO review (Avoid)

•    CCAL is engaged in the trading of agricultural products with third-party contracts.
•    It has posted an average financial performance so far. 
•    Based on FY23 earnings, the issue appears greedily priced. 
•    There is no harm in skipping this pricey bet. 

ABOUT COMPANY:
City Crops Agro Ltd. (CCAL) is engaged in the business of trading products like seeds, and agricultural products mainly Rice, Wheat, Onions, Potato, Tomato, Isabgol, and Pulses. It has an integrated online platform that includes products such as cereals, oil seeds, pulses, and vegetables. The company is also engaged in contract manufacturing for agricultural produce such as Cucumber, Onion, and Castor.

The company sources the agricultural products from the manufacturers by paying an advance payment with its labeling and then these products are sold to a network of distributors. 

In contract manufacturing, it leases agricultural land on lease and cultivates Cucumber, Onion, and Castor to meet the demand in the market. This gives the company control over the entire process and gets the agricultural products at better rates as compared to the market. A part of the yield is shared with the farmers working on a contractual basis on the leased land, which further helps the local farmers' community. The company currently has around 47.31 acres of land for agricultural production. As of the date of filing this offer document, it had 9 employees on its payroll.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden IPO of 6000000 equity shares of Rs. 10 each at a fixed price of Rs. 25 per share to mobilize Rs. 15.00 cr. The issue opens for subscription on September 26, 2023, and will close on October 03, 2023. The minimum application to be made is for 6000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. The issue constitutes 36.77% of the post-IPO paid-up capital of the company. CCAL is spending Rs. 0.30 cr. for this IPO process and from the net proceeds, it will utilize Rs. 11.25 cr. for working capital, and Rs. 3.45 cr. for general corporate purposes.

Turnaround Corporate Advisors Pvt. Ltd. is the sole lead manager and Skyline Financial Services Pvt. Ltd. is the registrar of the issue. NNM Securities Pvt. Ltd. is the market maker for the company. For this IPO NNM has underwritten 85% while Turnaround has underwritten to the extent of 15%. 

The company has issued the entire equity capital at par value so far and has also issued bonus shares in the ratio of 7 for 1 in August 2021. The average cost of acquisition of shares by the promoters is Rs. 9.91, and Rs. 9.93 per share. 

Post IPO, CCAL's current paid-up equity capital of Rs. 10.32 cr. will stand enhanced to Rs. 16.32 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 40.79 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has posted a total revenue/net profit of Rs. 3.49 cr. / Rs. 0.04 cr. (FY21), Rs. 17.76 cr. / Rs. 0.48 cr. (FY22), and Rs. 24.63 cr. / Rs. 1.17 cr. (FY23). 

For the last three fiscals, the CCAL has reported an average EPS of Rs. 8.01 and an average RoNW of 20.55%. The issue is priced at a P/BV of 2.16 based on its NAV of Rs. 11.58 as of March 31, 2023, and at a P/BV of 1.51 based on post-IPO NAV of Rs. 16.51 per share. 

If we attribute FY23 earnings to the post-IPO fully diluted paid-up equity capital of the company, then the asking price is at a P/E of 34.72, making this IPO greedily 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 the offer documents, CCAL has shown MK Exim, and Alstone Textiles as their listed peers. They are trading at a P/E of 16.98, and 3.10 (as of September 22, 2023). However, they are not comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
This is the 2nd mandate from Turnaround in the last four fiscals (including the ongoing one). The only listing that took place in the period opened at a premium of 0.91% on the date of listing.