CLN Energy BSE SME IPO review (May apply)

•    The company is engaged in the manufacturing and marketing of power related products that are sold on B2B models.
•    It also provides powertrain components for 2-3-4 wheeler EVS industry and markets it under own brand called” CLN Energy”.  
•    It posted degrowth in bottom lines for FY23 following exception provisions on account of fire incident.
•    Super Earnings post FY24 raises eyebrows and sustainability over its sustainability.
•    Based on recent earnings, the issue appears fully priced. 
•    Well-informed investors may park funds for long term.

ABOUT COMPANY:
CLN Energy Ltd. (CEL) has been incorporated on October 01, 2019 with a vision to manufacture products that reduces the carbon emission and commits to sustainability. The company is engaged in the manufacturing of customized Lithium-ion Batteries, motors and deals in powertrain components of electric vehicles such as controllers, throttles, DC-DC converters, display, differential etc. The company offers B2B solutions for both mobility applications such as electric two, three and four wheelers, including traction application as well as stationary applications such as solar, ESS, and telecommunications, it also offers unique and customised solutions for various applications wherein lithium-ion battery packs are used. CEL sells Lithium-ion Battery Packs, motors and powertrain components under the “CLN Energy” brand.

Presently, CEL operates two manufacturing facilities, one located in Noida, Uttar Pradesh, and the other in Pune, Maharashtra. Its facilities in Noida and Pune span 42,000 sq. ft and 21,000 sq. ft, respectively, and are equipped with the latest technology. It manufactures lithium-ion battery packs for both mobility and stationary applications. Its current installed manufacturing setup has a Cell Grading Capacity of 168 MWH per annum, Cell Sorting capacity of 358 MWH per annum, manufacturing capacity of 130 MWH per annum, and Battery testing capacity of 72 MWH per annum for two-wheeler batteries, which is the combined capacity of both Noida and Pune facilities. For batteries other than two-wheelers, its facility has a Cell Grading Capacity of 41 MWH per annum, Cell Sorting capacity of 110 MWH per annum, manufacturing capacity of 115 MWH per annum, and Battery testing capacity of 41 MWH per annum. Additionally, its Noida facility has an installed capacity of 60,000 motors per annum.

The company has in-house R&D capabilities to design and integrate the various powertrain and power systems to offer the complete solution for mobility and energy storage application like UPS, Telecom etc. With the use of lithium-ion batteries along with high efficiency DC power systems, intelligent energy management, remote operation and management, it can help customers to achieve cost savings, reduced carbon emission for green environment and better insights of their product. The Company provides critical business solution for the customers who wants to use lithium-ion batteries with a specific power capacity as required for their application. The Company also sells the design and prototype solutions to the customers who further use them to manufactures products basis on these designs.  As of September 30, 2024, it had 155 employees on payroll and 286 employees on contract basis.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden book building route IPO of 2892000 equity shares to mobilize Rs. 72.30 cr. (at the upper cap). The company has announced the price band of Rs. 235 – Rs. 250 per share of Rs. 10 each. The issue opens for subscription on January 23, 2025, and will close on January 27, 2025. 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 27.40% of the post-IPO paid up equity capital of the company. From the net proceeds of the issue, it will utilize Rs. 9.71 cr. for purchase of machinery and equipment, Rs. 40.22 cr.  for working capital, and the rest for general corporate purposes. 

The issue is solely lead managed by Aryaman Financial Services Ltd., and Bigshare Services Pvt. Ltd. Is the registrar to the issue, Aryaman Capital Markets Ltd. is the market maker. The issue is underwritten to the extent of 94.61% by Aryaman Financial and 5.39% by Aryaman Capital.

After issuing initial equity shares at par value, the company issued further equity shares at a fixed price of Rs. 150.00 in January 2022, and has also issued bonus shares in the ration of 2 for 1 in November 2023, and 125 for 100 in June 2024. The average cost of acquisition of shares by the promoters is Rs. 3.95 per share. 

Post-IPO, company’s current paid-up equity capital of Rs. 7.66 cr. will stand enhanced to Rs. 10.55 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 263.83 cr.

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has posted a total income/net profit of Rs. 121.70 cr. / Rs. 3.64 cr. (FY22), Rs. 128.88 cr. / Rs. 0.73 cr. (FY23), and Rs. 132.85 cr. / Rs. 9.79 cr. (FY24). For H1 of FY25 ended on September 30, 2024, it earned a net profit of Rs. 4.64 cr. on a total income of Rs. 75.84 cr. Setback for FY23 bottom line is attributed to exception provisions on account of fire incident at Noida plant. 

For the last three fiscals, the company has posted an average EPS of 7.51 and an average RoNW of 64.62%. The issue is priced at a P/BV of 10.63 based on its NAV of Rs. 23.51 as of September 30, 2024, and at a P/BV of 2.92 based on its posts-IPO NAV of Rs. 85.58 per share (at the upper cap). 

If we attribute FY25 annualized super earnings to its post-IPO fully diluted paid-up capital, then the asking price is at a P/E of 28.44. Based on FY24 earnings, the issue is at a P/E of 26.94. The issue relatively appears fully priced based on its recent financial performance. Super earnings in pre-IPO period raise eyebrows.

For the reported periods, the company has posted PAT margins of 2.99% (FY22), 0.57% (FY23), 7.38% (FY24), 6.20% (H1-FY25), and RoCE margins of 175.47%, 25.21%, 91.55%, 40.06%, respectively for the referred periods.

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. 

COMPARISION WITH LISTED PEERS:
As per the offer document, the company has shown Eveready Ind., Panasonic Energy, High Energy Batteries, and Indo National, as their listed peer. It is trading at a P/E of 35.9, 24.8, 43.9, and 2.87(as of January 20, 2025). However, they are not truly comparable on an apple-to-apple basis.  

MERCHANT BANKER’S TRACK RECORD:
This is the 17th mandate from Aryaman Financial in the last three fiscals. Out of the last 10 listings, all listed with premiums ranging from 0.29% to 31.15% on the date of listings.