Evoq Remedies BSE SME IPO review (Avoid)

•    ERL is in the trading of pharma products with third party deals.
•    It does not have its own production unit.
•    Its financial performance missing the match for the asking price.
•    Super earnings for FY21 onwards raises concern about sustainability.
•    There is no harm in ignoring this highly-priced IPO. 

ABOUT COMPANY:
Evoq Remedies Ltd.(ERL) though formed in the year 2010, it started its operations in 2018.  It is one of the recognized trading houses of pharmaceuticals raw materials products and chemicals. It deals with WHO-GMP registered entities. The company is trading in pharma raw materials, excipients, bulk drugs etc. 

The company operates on third party deals and has no assets of its own. As of December 31, 2021, it had 8 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its need for working capital (Rs. 6.44 cr.) and general corporate purpose (Rs. 2.33 cr.), ERL is coming out with its maiden IPO of 3600000 equity shares of Rs. 10 each at a fixed price of Rs. 27 per share to mobilize Rs. 9.72 cr. The issue opens for subscription on March 17, 2022, and will close on March 22, 2022. Minimum application is to be made for 4000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. The issue constitutes 26.47% of the post issue paid-up capital of the company. ERL will be spending Rs. 0.95 cr. for this IPO process. 

The issue is solely lead managed by Swastika Investmart Ltd., and Bigshare Services Pvt. Ltd. is the registrar to the issue. Sunflower Broking Pvt. Ltd. is the market maker for this company. 

Having issued initial equity capital at par value, ERL issued further equity at Rs. 28 per share in February 2022. It has also issued bonus shares in the ratio of 70 for 1 in December 2021. The average cost of acquisition of shares by the promoters is Rs. 6.57 and Rs. 9.33 per share.

Post this IPO, ERL's current paid-up equity capital of Rs. 10.00 cr. will stand enhanced to Rs. 13.60 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 36.72 cr. 

FINANCIAL PERFORMANCE: 
On the financial performance front, ERL has posted turnover/net profits of Rs. 3.25 cr. / Rs. 0.01 cr. (FY19), Rs. 9.07 cr. / Rs. 0.003 cr. (FY20), Rs. 10.03 cr. / Rs. 0.71 cr. (FY21). For the FY22 till February 10, 2022, it has earned a net profit of Rs. 0.94 cr. on a turnover of Rs. 10.57 cr. The sudden boost in bottom lines since FY21 i.e. pre-IPO year and IPO year is surprising and raises concern. 

For the last three fiscals, ERL has posted an average EPS of Rs. 5.05 and an average RoNW of 57.41%. The issue is priced at a P/BV of 2.60 based on its NAV of Rs. 10.37 as of March 31, 2021, and at a P/BV of 1.66 based on its post-IPO NAV of Rs. 16.22.

If we annualize FY22 earnings and attribute it to the post IPO fully diluted equity, then the asking price is at a P/E of 33.75, thus this issue is aggressively priced. 

COMPARISON WITH LISTED PEERS:
As per offer documents, ERL has no listed peers to compare with. 

DIVIDEND POLICY:
The company has not paid any dividend for the reported period in the offer document. It will adopt a prudent dividend policy post listing, based on its financial performance and future prospects. 

MERCHANT BANKER'S TRACK RECORDS: 
After lying dormant for FY20 and FY21, this is the second mandate from Swastika Investmart in the last three fiscals (including the ongoing one). The only recent listing (Richa Info) happened at par value on the day of listing.  On the mandates till FY19, out of the last 10 listings, 3 opened at discount, 1 at par and the rest with premiums ranging from 1.67% to 20% on the day of listings.