Ducol Organics NSE SME IPO review (May apply)

•    DOCL is engaged in the manufacturing and marketing of pigments and related products.
•    The super earnings reported by the company for the past 30 months raise eyebrows. 
•    Based on its current financials, the issue appears fully priced. 
•    The sustainability of such margins going forward holds the key.
•    Well-informed investors may park funds for long-term rewards.

ABOUT COMPANY:
Ducol Organics and Colours Ltd. (DOCL) is engaged in the business of manufacturing and selling pigment dispersions, preparations concentrate, paste colourants, and masterbatches. It offers a range of pigment dispersions for various industries like Paints, Inks, Textiles, Detergent, Paper, Rubber, and Plastics. colour solutions for various industries like paints, ink, textile, rubber, plastic, leather, paper, soaps, detergents, and FMCG.

Currently, it is operating out of 2 units in Taloja and a third unit at Mahad is in process of getting established with trials currently being conducted. As on October 31, 2022, the company had 79 permanent employees on its payroll.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden IPO of 4040000 equity shares of Rs. 10 each at a fixed price of Rs. 78 per share to mobilize Rs. 31.51 cr. The issue opens for subscription on January 09, 2023, and will close on January 11, 2023. The minimum application to be made is for 1600 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 27.79% of the post-issue paid-up capital of the company. DOCL is spending Rs. 0.80 cr. for this IPO process and from the residual funds, it will use Rs. 23.78 cr. for working capital and Rs. 6.93 cr. for general corporate purposes. 

First Overseas Capital Ltd. is the sole lead manager for this issue and Bigshare Services Pvt. Ltd. is the registrar of the issue.  BHH Securities Pvt. Ltd. is the market maker for this company and has underwritten a lion's portion of the IPO. 

The company has issued the entire equity so far at par value and has also issued bonus shares in the ratio of 5 for 2 in May 2022. The average cost of acquisition of shares by the promoters is Rs. - (10.29) and Rs. - (10.30) per share. (i.e. a negative cost of acquisitions).

Post-IPO, DOCL's current paid-up equity capital of Rs. 10.50 cr. will stand enhanced to Rs. 14.54 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 113.41 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, DOCL has posted a turnover/net profit of Rs. 73.72 cr. / Rs. 0.07 cr. (FY20), Rs. 78.86 cr. / Rs. 2.81 cr. (FY21), and Rs. 88.94 cr. / Rs. 4.91 cr. (FY22). For H1 of FY23 ended on September 30, 2022, it earned a net profit of Rs. 4.17 cr. on a turnover of Rs. 48.75 cr. The sudden boost in the net profits for the last 30 months raises eyebrows. 

For the last three fiscals, DOCL has reported an average EPS of Rs. 3.24 and an average RoNW of 17.66%. The issue is priced at a P/BV of 3.30 based on its NAV of Rs. 23.67 as of September 30, 2022, and at a P/BV of 2.01 based on its post-IPO NAV of Rs. 38.76 per share. 

If we annualize FY23 earnings and attribute it to post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of around 13.59. Thus based on its super earnings, the issue appears fully priced. On the basis of FY22 earnings, the issue is priced at a P/E of 23.08. The sustainability of margins reported for H1 of FY23 is a major concern.

DIVIDEND POLICY:
The company has paid a dividend of 30% for FY21 and FY22. 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, DOCL has shown Aksharchem, Asahi Sungwon, Clariant Chemicals, Vipul Organics, Ultramarine & Pigments, and Sudarshan Chemical as their listed peers. They are currently trading at a P/E of 21.49, 15.64, 29.88, 31.11, 14.20, and 38.54 (as of January 06, 2023). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
This is the 15th mandate from First Overseas in the last four fiscals (including the ongoing one). Out of the last 10 listings, 1 opened at discount, 2 at par, and the rest with premiums ranging from 2.5% to 120% on the day of listing.