Electro Force NSE SME IPO review (Avoid)

•    EFIL is engaged in manufacturing electrical components, metal/plastic contact parts.
•    The company is operating in highly competitive and fragmented segment.
•    It has posted inconsistency in its top and bottom lines for the reported periods. 
•    The issue appears fully priced based on its annualized FY24 super earnings. 
•    There is no harm in skipping this dicey IPO.

ABOUT COMPANY:
Electro Force (India) Ltd. (EFIL) is an ISO 9001:2015-certified company that designs and manufactures electrical components, metal / plastic contact parts, and supplies these products to the industry players via a business-to-business (B2B) model. The company started in the year 2010 as Electro Force (India) Pvt. Ltd. Since inception, it has been a supplier of high grade precision metal electrical contact parts and components, connectors and assemblies for applications in electronics, lighting, switchgear and allied industries in India. 

Its manufacturing unit is located at Vasai in Maharashtra. The company offers end-to-end product solutions to customers under the B2B model wherein it provides services ranging from designing, manufacturing, quality testing and packaging to logistics. The company also offers products in the intermediate stages to many customers. Its main focus has been on offering integrated services, mostly to Indian manufacturers of electrical components. 

It has the ability to perform precision metal stamping, assembly, and moulding. As claimed by the company, over the past 13 years, it has accumulated invaluable experience in helping customers create new designs, incorporating cutting-edge technologies, and effectively utilizing its manufacturing facilities, equipment, and materials. As a result, the company is constantly improving product offerings to better serve customer's needs. As of October 31, 2023, it had 31 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden combo IPO of 8674800 equity shares of Rs. 10 each at a fixed price of Rs. 93 per share to mobilize Rs. 80.68 cr. The issue consists of 6000000 fresh equity shares (worth Rs. 55.80 cr.), and an Offer for Sale (OFS) of 2674800 shares (worth Rs. 24.88 cr.). The issue opens for subscription on December 19, 2023, and will close on December 21, 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 37.07% of the post-IPO paid-up capital of the company. EFIL is spending Rs. 11.40 cr. for this IPO process (fresh issue), and from the net proceeds, it will utilize Rs. 25.00 cr. for working capital, Rs. 5.50 cr. for inorganic growth, and Rs. 13.90 cr. for general corporate purposes. The overall spending for this IPO process is Rs. 12.40 cr. 

First Overseas Capital Ltd. is the sole lead manager and Skyline Financial Services Pvt. Ltd. is the registrar of the issue. Arham Shares Pvt. Ltd. is the market maker for the company. The issue is underwritten 15.01% by First Overseas and 84.99% by Ekadrisht Capital. 

The company has issued entire equity capital at par value so far and has also issued bonus shares in the ratio of 62 for every 25 shares in March 31, 2023. The average cost of acquisition of shares by the promoters is Rs. 2.87 per share. 

Post-IPO, EFIL's current paid-up equity capital of Rs. 17.40 cr. will stand enhanced to Rs. 23.40 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 217.62 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company posted a total income/net profit / -(loss) of Rs. 15.87 cr. / Rs. - (2.24) cr. (FY21), Rs. 34.44 cr. / Rs. 8.64 cr. (FY22), and Rs. 30.29 cr. / Rs. 8.00 cr. (FY23). For H1 of FY24 ended on September 30, 2023, it earned a net profit of Rs. 7.11 cr. on a total income of Rs. 23.14 cr. Thus it marked fluctuating top and bottom lines for the reported periods. The erratic financial performance in non-convincing.

For the last three fiscals, the company reported an average EPS o Rs. 3.74 and an average RoNW of 27.86%. The issue is priced at a P/BV of 6.36 based on its NAV of Rs. 14.63 as of September 30, 2023, and at a P/BV of 2.68 based on its post-IPO NAV of Rs. 34.73 per share. 

If we attribute FY24 annualized earnings on post-IPO fully diluted paid-up equity capital of the company, then the asking price is at a P/E 15.30. The issue appears fully priced bases on its super FY24 earnings. KPI data on PAT, RoE, RoCE margins for the reported periods is missing from the offer document. Perhaps it has suppressed it deliberately as it wants to play with only EBITDA margins for an eyewash. 

DIVIDEND POLICY:
The company has not declared any dividends for the reported periods of the offer document. It will adopt a prudent dividend policy based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per the offer document, the company has shown Centum Electronics and RIR Power as their listed peers. They are trading at a P/E of 46.33 and 75.07 (as of December 15, 2023). However, they are not comparable on an apple-to-apple basis. This compare appears to be an eyewash. 

MERCHANT BANKER'S TRACK RECORD:
This is the 23rd mandate from First Overseas in the last three fiscals. Out of the last 10 listings, 1 opened at discount, 1 at par and the rest with premiums ranging from 0.04% to 43.53% on the date of listing.