Empyrean Cashews NSE SME IPO review (Avoid)

•    ECL is engaged in the processing of cashew nuts into kernels in different flavours. 
•    It posted declining trends in the top and bottom lines for the last three fiscals. 
•    Boosted margins for FY22 so far raises eyebrows.
•    The company is in a highly competitive and fragmented segment. 
•    The issue is aggressively priced even on the basis of super FY22 performance so far. 

ABOUT COMPANY:
Empyrean Cashews Ltd. (ECL) commenced operations in 2014 under the name and style of the brand "Krishival Cashews". The Company was incorporated in 2014 and is engaged in processing raw cashew nuts into finished cashew kernels in different flavours, with a presence in more than 26 tier II and tier III towns and cities. It primarily caters to the domestic market with a network of more than thirty (30) distributors across India. ECL procures the majority of raw materials by way of import from certain African and Asian countries and also from the Konkan region of India. 

The company focuses on the quality of products to increase its presence across the country. As of the date of this Prospectus, it has one Subsidiary namely, Siddhivinayak Cashew Industries Private Limited. In addition to processing raw cashews, it is also engaged in the business of organic manure which is prepared by using by-products like husk and other biodegradable material left after the processing of the raw cashews. Based on the audited restated financials for FY 2021, 93% of its revenue is derived from the sale of cashews whilst the remaining 7% is derived from the sale of organic manure.

As of December 31, 2021, it has 196 employees on its payroll. Its capacity utilization marked a roller-coaster. Capacity utilization was 69% for FY19, 70% FY20, 40% for FY21 and 46.75% for the FY22 till the first seven months. 

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its needs for working capital (Rs. 15.00 cr.), general corporate purpose (Rs. 3.74 cr.), ECL is coming out with a maiden IPO of 5247000 equity shares of Rs. 10 each at a fixed price of Rs. 37 per share to mobilize Rs. 19.41 cr. The issue opens for subscription on March 21, 2022, and will close on March 23, 2022. Minimum application is to be made for 3000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on the NSE SME Emerge platform. The issue constitutes 26.50% of the post issue paid-up capital of the company. ECL will be spending Rs. 0.67 cr. for this IPO process. 

The issue is solely lead managed by Systematix Corporate Services Ltd. and Purva Sharegistry (India) Pvt. Ltd. is the registrar to the issue. Systematix Shares and Stocks (India) Ltd. is the market maker for this company.  

The company has raised entire equity capital at par value so far. The average cost of acquisition of shares by the promoters is Rs. 10 per share. 

Post-IPO, ECL's current paid-up equity capital of Rs. 14.55 cr. will stand enhanced to Rs. 19.80 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 73.24 cr. 

FINANCIAL PERFORMANCE: 
On the financial performance front, for the last three fiscals, ECL has posted turnover/net profits of Rs. 50.47 cr. / Rs. 0.65 cr. (FY19), Rs. 44.39 cr. / Rs. 0.96 cr. (FY20) and Rs. 28.58 cr. / Rs. 0.67 cr. (FY21). For the first seven months of FY22 ended on October 31, 2021, it has earned a net profit of Rs. 1.67 cr. on a turnover of Rs. 27.23 cr. 

For the last three fiscals, ECL has posted an average EPS of Rs. 0.53 and an average RoNW of 3.99%. The issue is priced at a P/BV of 2.55 based on its NAV of Rs. 14.51 as of October 31, 2021, and at a P/BV of 1.81 based on its post-IPO NAV of Rs. 20.47. 

If we annualize FY22 earnings and attribute it to fully diluted post-IPO paid-up equity capital, then the asking price is at a P/E of 25.69. 

DIVIDEND POLICY: 
The company has not paid any dividends so far. 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, ECL has no listed peers to compare with. 

MERCHANT BANKER'S TRACK RECORDS:
The last mandate from Systematix was in March 2018 and there were no mandates from FY18-19 to FY20-21. So this is the first mandate after long in FY21-22. The Annexure is missing from offer documents on its track records. March 2018 2 mandates opened with a premium ranging from 0.18% to 5.61% on the day of listing and currently trading at a discount.