De Neers Tools NSE SME IPO review (Avoid)

•    DNTL is in the business of manufacturing and marketing hand tools.
•    It operates in a highly competitive and fragmented segment.
•    After listless performance for FY20 and FY21, it marked super earnings.
•    Based on its recent super earnings, the issue appears fully priced. 
•    There is no harm in skipping this fully priced issue. 

PREFACE:
The IPO is a book-building issue, its ad in the media is silent on the merchant banker's track record and post-IPO NAV data. The sudden boost in its bottom lines for the last 19 months working raise eyebrows and concerns over sustainability amidst cutthroat competition and a fragmented segment. There are few transparency lapses for public information.

ABOUT COMPANY:
De Neers Tools Ltd. (DNTL) was originally promoted as De Neers Tools LLP and it took over Deewan Chand Madanlal & Sons as a going concern in June 2021. This merged firm was converted into a public limited company as of July 26, 2021. The company sells its products under the "De Neers" brand. 

DNTL is among the few key players in the hand tool industry as per the industry report of CareEdge. It provides a very broad range of hand tools in India with approximately two-thirds of revenue geographically concentrated in the states of Delhi NCR, Gujarat, Telangana, Bihar & Uttar Pradesh (UP). Its extensive range of products includes spanners, wrenches, pliers, cutters, Allen keys, hammers, socketry, screwdrivers, tool kits, tool cabinets, trolleys, etc. The company is also specialized in providing safety tools like non-sparking tools, insulated steel tools, non-sparking insulated tools, stainless steel & magnetic tools, titanium tools along with multiple other hand tools. 

DNTL's focus is on producing tools that can stand up to the demands of the professionals who use them every day. De Neers is widely accepted by dealers/distributors, and hardware suppliers throughout India. At present, the company has approximately 250 dealers throughout India and also looking for export possibilities. As of November 30, 2022, it had 92 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden IPO of 2276400 equity shares of Rs. 10 each via book building route to mobilize around Rs.23 cr. The company has announced a price band of Rs. 95 - Rs. 101 per share and at the upper cap, it mulls raising Rs.  23.00 cr. The issue opens for subscription on April 28, 2023, and will close on May 03, 2023. The minimum application to be made is for 1200 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 26.45% of the post-issue paid-up capital of the company. DNTL is spending Rs. 0.50 cr. for this IPO process and from the net proceeds, it will utilize Rs. 18.00 cr. for working capital and the rest balance for general corporate purposes. It has allocated 49.92% for QIBs, 15.05% for HNIs and 35.04% for Retail investors excluding the market maker portion of 5.06%. 

Khambatta Securities Ltd. and Share India Capital Services Pvt. Ltd. are the joint lead managers and Bigshare Services Pvt. Ltd. is the registrar of the issue. Share India Group's Share India Securities Ltd. is the market maker for the company. 

Having issued the initial equity shares at par, the company issued bonus shares in the ratio of 210 for 1 in October 2022. The average cost of acquisition of shares by the promoters is Rs. 0.05 per share. 

Post-IPO, DNTL's current paid-up equity capital of Rs. 6.33 cr. will stand enhanced to Rs. 8.61 cr. Based on the upper cap of IPO pricing, the company is looking for a market cap of Rs. 86.93 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, DNTL has posted a turnover/net profit of Rs. 73.50 cr. / Rs. 0.56 cr. (FY20), Rs. 62.12 cr. / Rs. 0.54 cr. (FY21), Rs. 18.80 cr. / Rs. 0.05 cr. (for a broken period from 01.04.21 to 25.07.21 of FY22) and Rs. 61.29 cr. / Rs. 4.99 cr. (for a broker period from 26.07.21 to 31.03.22 of FY22). If we total FY22 data, for the entire year, the company has reported a turnover of Rs. 80.09 cr. with a net profit of Rs. 5.04 cr. 

For the first 7 months of FY23 ended on October 31, 2022, it earned a net profit of Rs. 3.87 cr. on a turnover of Rs. 56.03 cr. Thus the sudden boost in its bottom lines raises eyebrows as well as concern over sustainability as it is operating in a highly competitive and fragmented segment. It appears that there has been some window dressing in FY22 and 7M of FY23 financial data to pave the way for fancy valuations. 

For the last three fiscals, the company has posted an average EPS of Rs. 5.61 (?) and an average RoNW of 18.47%. The issue is priced at a P/BV of 2.68 based on its NAV of Rs. 37.63 as of March 31, 2022. NAV data as of October 31, 2022, is missing from the offer document. Even the IPO ad is missing its post-IPO NAV data. 

If we annualize FY23 super earnings and attribute them to post-IPO fully diluted paid-up equity capital, the asking price is at a PE of 13.10. Thus the issue appears fully priced even with super earnings.  

DIVIDEND POLICY:
The company has not declared any dividends since incorporation. It will adopt a prudent dividend policy post-listing, based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per the offer document, the company has shown Taparia Tools as their listed peers. It is currently trading at a P/E of around 0.04 (as of March 20, 2023 - as per BSE Website data). However, they are not truly comparable on an apple-to-apple basis.  

MERCHANT BANKER'S TRACK RECORD:
This is the 6th mandate from Khambatta Securities in the last six fiscals (including the ongoing one). Out of the last 4 listings, all opened at premiums ranging from 0.61% to 66.67% on the listing date. 

This is the 7th mandate from Share India Capital in the last six fiscals (including the ongoing one). Out of the last 5 listings, 4 opened at par and the rest with a premium of 1.82% on the listing date.