Foce India NSE SME IPO review (Avoid)

•    FIL is engaged in the supply of watches, corporate gift articles.
•    It has posted inconsistency in top lines with fluctuating bottom lines.
•    Bumper profits for Q1 FY22 raises eyebrows and concern for sustainability.
•    Based on these super earnings, issue pricing is at 18+ P/E.
•    There is no harm in ignoring this pricy IPO. 

ABOUT COMPANY:
Foce India Ltd. (FIL) is mainly engaged in the business of supply, distribution and retailing of various types of wristwatches such as Analog, Digital, Chronograph, Designer etc. which are either custom-built or general in nature. Its Revenue from Top 10 customers during the year 2020-21 is consisting of Wrist Watches and Corporate Gifting.

FIL is also involved in the business of corporate gifting (such as Time Piece, Wall Clocks, Belts, Ties, Wallets, Pens, Goggles etc.) ornamental packaging boxes for watches, selling of watches and other products under royalty brands which constitute around 4.41% of total revenue. 

Presently, it is procuring entire requirement of watches and other products from its group concern namely M/s Foce Industries, a partnership firm, which is engaged in the business of manufacturing /assembling wristwatches at Guwahati, Assam. On April 06, 2021, it has incorporated a wholly-owned subsidiary company namely FO Industries Private Limited in Mumbai with an object to carry on the business of manufacturing/ assembling watches and other products and the facilities is being located at Bhiwandi, Near Mumbai. This subsidiary was incorporated to increase the supply of finished products and minimize dependency on group concerns. This subsidiary is likely to commence its business in the month of December 2021 and the funds required for investment in a subsidiary is met out of the internal accrual of the company. As of June 30, 2021, it has 128 showrooms/outlets on a Pan-India basis and 12 employees on the payroll.  

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its needs for working capital (Rs. 15.50 cr.) and general corporate purpose (Rs. 4.00 cr.), FIL is coming out with a maiden IPO of 1290000 equity shares of Rs. 10 each with a fixed price of Rs. 225 per share to mobilize Rs. 29.03 cr. The issue opens for subscription on December 13, 2021, and will close on December 17, 2021. The issue consists fresh equity issue of 900000 shares and 390000 equity shares by an offer for sale. The minimum application to be made is for 600 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 26.36% of the post issue paid-up capital of the company. FIL will be spending Rs. 0.75 cr., for this IPO process.

The issue is solely lead managed by Mark Corporate Advisors Pvt. Ltd., Purva Registry (India) Pvt. Ltd., is the registrar to the issue. SVCM Securities Pvt. Ltd., is the market maker for this issue. 

Having issued equity at par till April 2016, it raised further equity at Rs. 12.03 per share in May 2019. 

Post issue, FIL's current paid-up equity capital of Rs. 3.99 cr. will rise to Rs. 4.89 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 110.09 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, FIL has posted turnover/net profit of Rs. 62.08 cr. / Rs. 1.58 cr. (FY19), Rs. 54.44 cr. / Rs. 1.61 cr. (FY20) and Rs. 76.90 cr. / Rs. 1.99 cr. (FY21). For the first half of the FY22 ended on June 30, 2021, it has earned a net profit of Rs. 1.52 cr., on a turnover of Rs. 36.17 cr. Bumper profits in Q1 of FY22 raised eyebrows and also a concern for sustainability going forward. 

For the last three fiscals, the company has posted an average EPS of Rs. 4.72 and an average RoNW of 19.95%. The issue is priced at a P/BV of 7.37 based on its NAV of Rs. 30.51 as of June 30, 2021. It has not given details for post-issue expected NAV.

If we annualise FY22 earnings and attribute it to fully diluted post issue paid-up equity capital, then the asking price is at a P/E of 18.10 that appears lucrative. Based on FY21 earnings, the asking price is at a P/E of 55.28 making it an aggressively priced offer. 

COMPARISON WITH LISTED PEERS:
As per the offer documents, the company has shown Timex Group and KDDL Ltd., as its listed peers. They are currently trading at a P/E of 67.01 and 77.53 (as of December 10, 2021). However, they are not truly comparable on an apple-to-apple basis. 

DIVIDEND POLICY:
The company has not declared any dividend for the last three fiscals. It will adopt a prudent dividend policy post listing based on its financial performance and future prospects. 

MERCHANT BANKER'S TRACK RECORD:
On the merchant banker's performance front, this is the 7th mandate from its stable in the last four fiscals (including the ongoing one). It has changed the style of track record reporting (please refer to page 183) which is missing the info on the debut day performance of the listed IPO. However, based on this info, 4 issues are quoting at discounts for 180th-day reports while two are quoting at a premium. On average, it has a poor track record.