H M Electro BSE SME IPO review (Apply)

•    The company is engaged in providing turnkey projects on EPC contracts for infra projects of various types.
•    It posted steady growth in its top and bottom lines for the reported periods.
•    As per historical data, it always marks better top and bottom lines for the second half.
•    Based on recent financial performance, the issue appears fully priced. 
•    Investors may park funds for the medium to long term.

ABOUT COMPANY:
HM Electro Mech Ltd. (HEML) is engaged in the field of turnkey projects of supply, installation, testing and commissioning of pumping machineries along with comprehensive operation and maintenance. Initially the core Business of the Company was Infra projects related to water supply scheme involving Pumping Machineries and allied accessories for water and waste water. Over the years it has diversified in the field of electrification projects with Indian railways, Nationalized Banks and Municipal Corporations. Recently it had started EPC (Engineering, Procurement and Construction) field projects which involves laying cross country pipe line and civil work related to water supply projects including construction of water treatment plant (WTP), Civil Work for Pump Houses, Diesel Generating Sets, Panel Room, Instrumentation, PLC-SCADA. For such EPC projects it is working in collaboration/joint ventures with other companies also for carrying out the civil work part of the project. 

The company is also engaged in sale of products which includes Pump, Pipes, Transformer, Motor and Other Electronic Accessories. Company is ISO 9001:2015 certified and Class ‘AA’ (highest category for EPC Contracts - unlimited bidding capacity subject to fulfilment of other tender conditions) with Irrigation division of Government of Gujarat. The Company is an approved electrical contractor with State Government of Rajasthan also under Indira Gandhi Nahar Pariyojana, Bikaner. The Company is authorized by Government of Gujarat Energy and Petrochemicals Department to carry out Electrical Installation Works in the Gujarat State.

The company has achieved a great reputation in this field within a short span of time with its strong & effective management and in time project execution. The company is proud to highlight accomplishments and ongoing efforts in various projects. Since 2018 it has completed 16 projects having aggregating of Rs. 132.10 cr. Apart from this, currently it is engaged in 37 ongoing projects having aggregating of Rs. 410.34 cr. out of which revenue recognised till September 30, 2024 amounts to Rs. 227.32 cr. The net order book stands at Rs. 183 cr. These projects not only met but exceeding clients’ expectations, providing a lasting benefit to the community. It underscores commitment to delivering high quality, impactful projects that meets diverse needs and drive progress. 

The key clients of the company include State Governments, Central Government, Municipal corporations, banking sector and educational institutes etc. It has a locational advantage in the state of Gujarat with nearly 84% of total revenue for the year ended March 31, 2024. It has strategically expanded presence and network to different parts of the country, taking on projects in various regions, including Rajasthan, Maharashtra, Madhya Pradesh, Punjab and Chandigarh etc. This expansion reflects its commitment to delivering expertise and a service to clients nationwide. HEML primarily secures contracts through a competitive tender bidding process. Its pricing strategy is carefully tailored to each project's unique requirements, taking into account factors such as engineering skills required for the project, construction type, estimated project duration, and the specific raw materials, equipment, and skilled manpower needed for successful project execution.  As of September 30, 2024, the Company had 30 permanent employees on the payroll and 107 working on contractual basis.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden book building route IPO of 3699200 equity shares to mobilize Rs. 27.74 cr. (at the upper cap). The company has announced the price band of Rs. 71 – Rs. 75 per share of Rs. 10 each. The issue opens for subscription on January 24, 2025, and will close on January 28, 2025. The minimum application to be made is for 1600 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. The issue constitutes 27.00% of the post-IPO paid up equity capital of the company. From the net proceeds of the fresh equity issue, it will utilize Rs. 21.00 cr. for working capital, and the rest for general corporate purposes. 

The issue is solely lead managed by Beeline Capital Advisors Pvt. Ltd., and Cameo Corporate Services Ltd. Is the registrar to the issue, Beeline group’s Spread X Securities Pvt. Ltd. is the market maker for the company as well as the syndicate member. 

The company has issued entire initial equity shares at par value. The average cost of acquisition of shares by the promoters is Rs. 10.00 per share. 

Post-IPO, company’s current paid-up equity capital of Rs. 10.00 cr. will stand enhanced to Rs. 13.70 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 102.74 cr.

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has posted a total income/net profit of Rs. 62.03 cr. / Rs. 2.58 cr. (FY22), Rs. 101.67 cr. / Rs. 6.01 cr. (FY23), and Rs. 117.30 cr. / Rs. 8.19 cr. (FY24). For H1 of FY25 ended on September 30, 2024, it earned a net profit of Rs. 3.34 cr. on a total income of Rs. 45.43 cr. 

For the last three fiscals, the company has posted an average EPS of 5.59 (on simple average basis) and an average RoNW of 23.39%. The issue is priced at a P/BV of 2.12 based on its NAV of Rs. 35.42 as of September 30, 2024, and at a P/BV of 1.63 based on its posts-IPO NAV of Rs. 46.10 per share (at the upper cap). 

If we attribute FY25 annualized super earnings to its post-IPO fully diluted paid-up capital, then the asking price is at a P/E of 15.37. Based on FY24 earnings, the issue is at a P/E of 12.54. The issue relatively appears fully priced based on its recent financial performance. According to the management, the segment in which it is working has always posted better second half historically, hence based on first half performance, annualized earnings will not give the real data. The yearly trends can be seen from the steady growth in its top and bottom lines from FY22 to FY24.

For the reported periods, the company has posted PAT margins of 4.17% (FY22), 5.92% (FY23), 6.99% (FY24), 7.36% (H1-FY25), and RoCE margins of 19.35%, 36.17%, 33.28%, 12.41%, respectively for the referred periods.

DIVIDEND POLICY:
The company has not declared any dividends for the reported periods of the offer document. It will adopt a prudent dividend policy based on its financial performance and future prospects. 

COMPARISION WITH LISTED PEERS:
As per the offer document, the company has shown HEC Infra, as its listed peer. It is trading at a P/E of 21.7 (as of January 21, 2025). However, they are not truly comparable on an apple-to-apple basis.  

MERCHANT BANKER’S TRACK RECORD:
This is the 57th mandate (Including mainboard issue) from Beeline Capital in the last three fiscals. Out of the last 10 listings, all listed with premiums ranging from 0.56% to 146.91% on the date of listings.