Dipna Pharmachem BSE SME IPO review (Avoid)

•    DPL is just a trader/distributor in pharma raw materials.  
•    It marked dismal financial performance for FY20 and FY21.
•    Super financial performance of FY22 (pre-IPO year) is a bit surprising.
•    The company operates in a highly competitive and fragmented segment. 
•    There is no harm in ignoring this pricy bet. 

ABOUT COMPANY: 
Dipna Pharmachem Ltd. (DPL) is engaged in the trading and distribution of a wide range of pharmaceutical raw materials which are also known as APIs (Active Pharmaceutical Ingredients), Excipient, and chemical formulation products. Presently its product portfolio comprises 61 AIPs and AIPs intermediates such as Cephalosporins, Cardiovascular, Anti - Bacteria, Quinolones, Veterinary, Anti - Virus, Anti - Inflammatory, Neuropsychiatry, Steroid Hormone, etc.

Being a trading and distribution company, it has a pan-India market for products. The Company also started selling chemicals on a commission basis in the Financial year 2022. As of April 30, 2022, it had 13 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY: 
To part finance its needs for working capital (Rs. 11.10 cr.) and general corporate purposes (Rs. 3.65 cr.), DPL is coming out with a maiden IPO of 4002000 equity shares of Rs. 10 each at a fixed price of Rs. 38 per share to mobilize Rs. 15.21 cr. The issue opens for subscription on August 25, 2022, and will close on August 30, 2022. The minimum application to be made is for 3000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. The issue constitutes 33.43% of the post-issue paid-up equity capital of the company. DPL is spending Rs. 0.46 cr. for this IPO process. 

The issue is solely lead managed by Interactive Financial Services Ltd. and Bigshare Services Pvt. Ltd. is the registrar to the issue. Sernet Financial Services Pvt. Ltd. is the market maker for this company. 

Having issued initial equity at par, DPL issued further equity shares in the price range of Rs. 40 - Rs. 100 between January 2016 and April 2022. It has also issued bonus shares in the ratio of 3 for 1 in April 2022 and 2 for 1 in May 2022. The average cost of the acquisition of shares by the promoters is Rs. 8.46 per share. 

Post-IPO, DPL's current paid-up equity capital of Rs. 7.97 cr. will stand enhanced to Rs. 11.97 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 45.49 cr. 

FINANCIAL PERFORMANCE: 
On the financial performance front, for the last three fiscals, DPL has reported turnover/net profits of Rs. 30.55 cr. / Rs. 0.06 cr. (FY20), Rs. 31.02 cr. / Rs. 0.02 cr. (FY21) and Rs. 72.77 cr. / Rs. 1.17 cr. (FY22). The quantum jump in FY22 performance appears to be the window dressing. 

For the last three fiscals, DPL has posted an average EPS of Rs. 0.75 and an average RoNW of 36.77%. The issue is priced at a P/BV of 3.68 based on its NAV of Rs. 10.34 as of March 31, 2022, and at a P/BV of 1.94 based on its post-IPO NAV of Rs. 19.59 per share. 

If we attribute the super earnings of FY22 on post IPO fully diluted equity capital, then the asking price is at a P/E of 39+, making it an aggressively priced bet. Since it is operating in a highly competitive and fragmented segment, the sustainability of such performance going forward is a major concern.  

DIVIDEND POLICY: 
The company has not declared/paid any dividend for the reported periods of the offer document. 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, DPL has shown Earum Pharma and A-1 Acid as its listed peers. They are currently trading at a P/E of 2.63 and 41.75 (as of August 22, 2022). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD: 
This is the 4th mandate from Interactive Financial in the last two fiscals (including the ongoing one). Out of the last 3 listings, 1 opened at a discount and the rest two with premiums ranging from 0.08% to 2.22% on the day of listing. Thus it has posted an average performance so far.