Frog Cellsat NSE SME IPO review (May apply)

•    FCL is engaged in telecom equipment manufacturing and related services.
•    Its business gained momentum and marked growth from FY20 onwards.
•    Based on its FY22 earnings, the issue appears fully priced. 
•    Cash surplus/risk seeker investors may consider an investment with a long-term perspective. 

PREFACE:
Frog Cell was earlier listed with NSE on its Emerge-ITP platform, but due to falling business, it opted for a delisting. It remained listed from 2014 to 2018. Now, with the product mix and new devices portfolio, it has revamped its activities and is now coming out with an IPO for the NSE Emerge listing. With a blue-chip clients list, it is now poised for a fast-forward mode and management hopes to maintain its performance. 

ABOUT COMPANY:
Frog Cellsat Ltd. (FCL) is engaged in the manufacturing of telecom equipment used by telecom operators, especially in Telecom Towers. It manufactures 2G/3G/4G Multi-Band Digital RF Repeaters, Multi-band Frequency Shift Repeater, Multi-band Optical DAS systems, relative software, and accessories. We also offer In-Building Coverage Planning and Design services along with Radio Access Network (RAN) and Backhaul Network installation services. The company has two production units one is located in Noida and the second one is located in Dehradun.

FCL's end-to-end RF enhancement solutions are well positioned in the industry for being price competitive, field-proven, future-ready, and highly reliable. Its design, development, manufacturing, and quality control processes are ISO 9001:2015 certified. FCL's success is an outcome of a strategic focus on innovative R&D, to produce a unique range of RF products conforming to the applicable standards from ETSI, 3GPP, TEC, and other standardization bodies.

The company is one of the most experienced and focused Telecommunication equipment suppliers. Since its inception, it has been expanding and diversifying its product portfolio to offer the widest range of indoor and outdoor coverage solutions in the industry today. It directly sells products in the market and is not dependent upon any dealers/distributors for the sale of products.

The company is providing its products and services across Asia, Europe, Africa, and the Middle East. Its main products are 2G/3G/4G Multi-Band Digital RF Repeaters, Multi-band Frequency Shift Repeater, Multi-band Optical DAS system, relative software, and accessories. Also, the company's Production line is equipped with anti-static equipment, all products are subject to rigorous, and reliable tests. As of August 31, 2022, it had 150 employees on its payroll. The company's customer list included Bharti Airtel, Voda-Idea, Jio, Nokia, Ericson, Adani, BSNL, etc. 

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its need for expansion project (Rs. 30.25 cr.), and general corporate purposes, FCL is coming out with a maiden IPO of 4075200 equity shares of Rs. 10 each via book building route with a price band of Rs. 97 to Rs. 102 per share to mobilize Rs. 62.52 cr. (at the upper cap). The issue opens for subscription on September 29, 2022, and will close on October 04, 2022. The minimum application is to be made for 1200 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 26.51% of the post-issue paid-up capital of the company. 

Out of the net issue post market maker portion, it has allocated 50% for QIBs, 15% for HNIs, and 35% for Retail investors. 

The issue is solely lead managed by Sarthi Capital Advisors Pvt. Ltd and Skyline Financial Services Pvt. Ltd. is the registrar to the issue. SS Corporate Securities Ltd. is the market maker for this IPO.

The company has issued initial equity shares at par. It has also issued bonus shares in the ratio of 4 for 1 in October 2013 and 225 for 1 in August 2022. The average cost of acquisition of shares by the promoters is Rs. (0.12) and Rs. 0.04 per share. 

Post-IPO, FCL's current paid-up equity capital of Rs. 11.30 cr. will stand enhanced to Rs. 15.38 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 156.83 cr. (at the upper cap). 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, FCL has (on a consolidated basis) posted a turnover/net profit of Rs. 88.51 cr. / Rs. 1.39 cr. (FY20), Rs. 129.40 cr. / Rs. 14.26 cr. (FY21), and Rs. 135.29 cr. / Rs. 14.34 cr. (FY22). The sudden boost in its static bottom lines for FY21 and FY22 raises eyebrows. The sustainability of such margins going forward is a major concern. 

For the last three fiscals, FCL has reported an average EPS of Rs. 2430.65 and an average RoNW of 18.88 %. The issue is priced at a P/BV of 0.007 based on its NAV of Rs. 13792.36 as of March 31, 2022 (on pre-bonus, pre-, and at a P/BV of 1.29 based on its post-IPO NAV of Rs. 79.20 per share. (at the upper price band). (Data of EPS and NAV is based on pre-bonus equity capital. It is missing restated data on this aspect on the basis of the post bonus issue. This appears to be an eyewash). 

If we attribute FY22 earnings on post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 10.93. Thus the issue appears fully priced based on its recent super earnings.

DIVIDEND POLICY:
The company has paid a dividend of Rs. 1000 (10000%) for FY21-22. It will adopt a prudent dividend policy post listing, based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per offer documents, FCL has shown ITI Ltd. and Astra Microwave as their listed peers. They are currently trading at a P/E of 90.78, and 64.01 (as of September 26, 2022). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
This is the 46th mandate from Sarthi Capital in the last 11 fiscals (including the ongoing one). Out of the last 9 listings, 2 opened at discount, 2 at par, and the rest with premiums ranging from 0.07% to 333.05% on the day of listing.