Earthstahl BSE SME IPO review (May apply)

•    EAL is engaged in the business of manufacturing cast iron lumps/ductile iron pipe fittings.
•    It has posted super earnings for the last 18 months and that raises a major concern.
•    Based on its earnings of FY23, the issue appears lucratively priced. 
•    Well-informed cash surplus investors may consider investment for the medium to long term.

ABOUT COMPANY:
Earthstahl & Alloys Ltd. (EAL) is engaged in the business of manufacturing Cast Iron Lumps and Ductile Iron Pipe Fittings. Cast Iron Lumps are used as raw material in steel foundries to manufacture products like cast iron pipe fittings, machine components such as latch machines, fan components, manhole covers, decorative cast iron pieces, cast iron pipe fitting, and other units engaged in manufacturing of steel or cast iron products. 

Ductile Iron Pipe Fittings are used in public water supply systems as connectors of pipes. EAL started operations of manufacturing cast iron in the year 2012 with one submerged electric arc furnace with a capacity of 3.6 MVA to manufacture 10,500 tonnes p.a. of Cast Iron Lumps and thereafter in the year 2017 it forayed into the Ductile Iron Pipes fittings segment to cater to the growing water infrastructure requirements in the country for which the company commissioned Lost Foam based Steel Foundry consisting of one induction furnace with two crucibles, one of 500 KG and another 1000 KG to produce Ductile iron pipe fittings of different dimensions, shapes, and sizes used in the water supply system. 

The foundry is also capable of producing parts or components of plant and machinery/ automobiles using foam moulds and therefore it can produce various parts for Pellet plants, Cement plants, Sponge iron plants, Power plants, Automobile Sector, Railway & Ductile Iron Pipes Fittings. Over the years EAL has been successful in manufacturing a full range of BIS Certified Ductile Iron Pipe Fittings of up to 600 mm width with accuracy, consistency & smooth surface finish. In the year 2022, the company also commissioned another 5.5 MVA submerged electric arc furnace to manufacture 15,750 tonnes p.a. of cast iron lumps. As of September 30, 2022, it had 161 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden IPO of 3240000 equity shares of Rs. 10 each via the book-building route. It has announced a price band of Rs. 38 - Rs. 40 per share. At the upper cap, the company is looking to mobilize Rs.12.96 cr. The issue opens for subscription on January 27, 2023, and will close on January 31, 2023. The minimum application is to be made for 3000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. The issue constitutes 26.47% of the post-IPO paid-up equity capital of the company. 

From the net proceeds of the IPO, the company will utilize Rs. 9.44 cr. for capital expenditure towards a change in electricity supply voltage from 33KV to 132KV at its existing manufacturing unit, Rs. 1.00 cr. for working capital, and balance for general corporate purposes.  The company has allocated 30% for QIBs, 35% for HNIs, and 35% for Retail investors. 

Hem Securities Ltd. is the sole lead manager for this issue and Bigshare Services Pvt. Ltd. is the registrar of the issue. Hem Securities Ltd. is also the market maker of the company. 

Having issued initial equity shares at par value, the company issued further equity shares in the price range of Rs. 34 - Rs. 100 per share between March 2012 and March 2015. It has also issued bonus shares in the ratio of 2 for 1 in January 2023. The average cost of acquisition of shares by the promoters is Rs. 7.79, Rs. 7.86, Rs. 10.92, and Rs. 11.24 per share. 

Post-IPO, EAL's current paid-up equity capital of Rs. 9.00 cr. will stand enhanced to Rs. 12.24 cr. Based on the upper cap of the issue price, the company is looking for a market cap of Rs. 48.96 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, EAL has posted a turnover/net profit (loss) of Rs. 31.82 cr. / Rs. - (0.34) cr. (FY20), Rs. 24.58 cr. / Rs. 2.67 cr. (FY21), and Rs. 49.08 cr. / Rs. 7.46 cr. (FY22). For the H1 of FY23, it earned a net profit of Rs. 5.81 cr. on a turnover of Rs. 48.25 cr. The boost in margins for the past 18 months of working is surprising and raises eyebrows.

For the last three fiscals, EAL has reported an average EPS of Rs. 5.07 and an average RoNW of 51.25%. The issue is priced at a P/BV of 2.20 based on its NAV of Rs. 18.19 as of September 30, 2022, and at a P/BV of 1.67 based on its post-IPO NAV of Rs. 23.97 per share (at the upper price band). 

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 4.22. This attractive P/E is based on its super earnings reported for the past 18 months and raises concerns about its sustainability. 

DIVIDEND POLICY:
The company has not declared any dividends 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, the company has no listed peers to compare with. 

MERCHANT BANKER'S TRACK RECORD:
This is the 20th mandate from Hem Securities in the last three fiscals (including the ongoing one). Out of the last 10 listings, all were listed at premiums ranging from 1.47% to 166.67% on the listing date.