Continental Seeds NSE SME IPO review (May apply)

Continental Seeds & Chemicals Ltd. (CSCL) is engaged in the business of developing, processing, grading and supplying of all kind of agricultural foundation and certified seeds and trading of Mentha Oil.  Company is engaged in the whole process of processing in varieties of seeds, foundation seed and processing of the same into certified seeds.Seed processing is a vital part of the seed production needed to move the improved genetic materials of the plant breeder into commercial channels for feeding the rapidly expanding world population. The farmer must get the quality seed that is free from all undesired materials because farmer’s entire crop depends on it. Seed can seldom be planted in the condition in which it comes from the growers. In fact, many seed lots containweed or crop seed or inert material that make them unfit for sale without processing. Crop seed also frequently have stems, awns, clusters or other structures, which prevent from flowing through the drill freely. CSCL also obtains seed certification certificate from Uttarakhand State Seed and Organic Production Certification Agency from time to time for its products.

To part finance its working capital and general corpus fund needs, CSCL is coming out with a maiden IPO of 1620000 equity shares of Rs. 10 each with a fixed price of Rs.26 per share to mobilize Rs. 4.21 crore. Issue opens for subscription on 21.03.18 and will close on 23.03.18. Minimum application is to be made for 4000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. Issue is solely lead managed by Navigant Corporate Advisors Ltd. and MAS Services Ltd. is the registrar to the issue. Issue constitutes 26.99% of the post issue paid up capital of the company. Average cost of acquisition of shares by the promoters is Rs. 2.86 per share. Since inception till 2005 it issued entire equity at par. In March 2012 it raised fresh equity at a price of Rs. 100 per share. It has also issued bonus shares in the ratio of 5 for 2 in June 2017. Post issue, its current paid up equity capital of Rs. 4.38 cr. will stand enhanced to Rs. 6.00 cr.

On performance front, CSCL has posted turnover/net profits of Rs. 54.93 cr. / Rs. 0.22 cr. (FY14), Rs. 57.90 cr. / Rs. 0.27 cr. (FY15), Rs. 58.44 cr. / Rs. 0.16 cr. (FY16) and Rs. 58.24 cr. / Rs. 0.49 cr. (FY17). Thus while its top line has almost remained static bottmline has witnessed inconsistency. For first nine month of the current fiscal, it has earned net profit of Rs. 0.66 cr. on a turnover of Rs. 57.65 cr. which is a bit surprising.  For last three fiscals it has posted an average EPS of Rs. 0.91 and an average RoNW of 6.25%. Issue is priced at a P/BV of 1.80 based on its NAV of Rs. 14.44 as on 31.12.17 and at a P/BV of Rs. 1.49 on the basis of its post issue NAV of Rs. 17.46. If we annualize latest earnings and attribute it on fully diluted equity post issue, then asking price is at a P/E of around 17 against industry average of around 16. Thus issue is fully priced. It has shown Mangalam Seeds and Camson Seeds as its listed peers and are trading at a P/E of around 38 and 14 respectively (as on 16.03.18).

On merchant banker’s front, this is the 10th mandate from its stable in the past three years. Out of last 9 listings, 3 opened at a discount to offer price, 1 at par and the rest 5 with a premium ranging from 5% to 20%.