G K P Printing BSE SME IPO review (May apply)

•    The primary business of the company is the manufacturing of corrugated boxes.
•    It is also engaged in trading of Kraft per, duplex paper etc.
•    9MFY19 results are based on the business succession process.
•    Based on 9MFY19 performance, issue pricing appears reasonable.


ABOUT COMPANY:
GKP Printing & Packaging Ltd. (GKP) is an ISO 9001:2015 certified Company engaged in the manufacturing of corrugated boxes. The company deals in various types of corrugated boxes such as master cartons, mono cartons, Honey comb partition boxes, Die cut self-locking boxes, storage bins, adjustable depth book flap, Ring flap boxes and unit cartons. It is also engaged in the trading of Kraft paper, Duplex paper and Low – Density Plastic Rolls (LD Rolls). Kraft paper and Duplex papers are the primary raw material in corrugated boxes manufacturing and their trading provides the benefits of backward integration to the company by enabling it to procure raw material at very competitive prices as compared to other manufacturers of the corrugated boxes. The company is registered with the Ministry of MSME as a manufacturer of corrugated paper containers.

Through a Business Succession Agreement dated April 14th, 2018 whereby the company acquired the substantial assets and liabilities of the respective proprietorship concerns.

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its working capital (Rs. 4.41 cr.) and general corporate fund (Rs. 1.47 cr.) needs, GKP is coming out with a maiden IPO of 2056000 equity shares of Rs. 10 each with a fixed price of Rs. 32 per share to mobilize Rs. 6.58 cr. The issue opens for subscription on 23.04.19 and will close on 26.04.19. Minimum application is to be made for 4000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. Issue constitutes 28.04% of the post issue paid-up capital of GKP. For raising Rs. 6.58 Cr. Company is spending Rs. 0.70 cr.

The issue is solely lead managed by Holani Consultants Pvt. Ltd. while Link Intime India Pvt. Ltd. is the registrar to the issue. Maverick Share Brokers Pvt. Ltd. is the market maker for the issue.

Having raised initial equity at par, the company has converted/issued further equity at a price of Rs. 32 per share in January 2019. The average cost of acquisition of shares by the promoters is Rs. 10.35 and Rs. 12.93 per share. Post issue, GKP's current paid up equity capital of Rs. 5.28 cr. will stand enhanced to Rs. 7.33 cr.

FINANCIAL PERFORMANCE:
On the financial performance front, for last three fiscals, GKP has (prior to succession process) posted turnover/net profits of Rs. 5.13 cr./ Rs.0.25 Cr. (FY16), Rs. 5.75 cr./Rs. 0.25 cr. (FY17) and Rs. 14.09 cr. / Rs. 0.55 cr. (FY18). For the first nine months ended on 31.12.18, it has earned a net profit of Rs. 2.76 cr. on a turnover of Rs. 19.23 cr. No doubt GKP has posted growth in top line and bottom line for FY17 and FY18, but the sudden boost in the top and bottom line for 9MFY19 is the result of the business succession process, as explained by the management.

The issue is priced at a P/BV of 1.83 on the basis of its NAV of Rs. 17.46 as on 31.12.18 and at a P/BV of 1.41 on the basis of post issue NAV of Rs. 22.62.

For the last three fiscals, average EPS and RoNW data are ignored by the company due to proprietary business, for 9MFY19 it has shown an EPS of Rs. 8.21 (not annualized) and RoNW of 42.48%.

If we annualize latest earnings and attribute it on fully diluted post issue equity, then asking price is at a P/E of around 6.37 which appears reasonable. Sustainability of such performance raises concern.

COMPARISION WITH LISTED PEERS:
As per offer documents, it has shown Worth Peripherals as its listed peer that is currently trading around 15 P/E (as on 18.04.19). However, it is not strictly comparable.

MERCHANT BANKER'S TRACK RECORD:
This is the third mandate from its stable. Out of last two listings, one opened at par and the 1 with a premium of 49.12% on the day of listing.