Jainam Ferro NSE SME IPO review (Avoid)

•    JFAL is engaged in the manufacturing and marketing of ferroalloys.
•    The company has posted declining trends in its top lines for the last 3 years.
•    Higher earnings in pre-IPO year raise concern. 
•    The issue is aggressively priced based on super earnings.
•    There is no harm in giving this issue a MISS.

ABOUT COMPANY: 
Jainam Ferro Alloys (I) Ltd. (JFAL) is currently manufacturing two types of Ferro Alloys namely, Ferro Manganese (FeMn) and Silico-manganese (SiMn). Both the alloys are largely used in the Steel industry. Ferro-manganese adds strength, toughness and other properties to steel. Silicomanganese provides additional silicon which is a stronger De-oxidant in manufacturing steel. The Company also generates revenue from its trading activities of manganese ore, used as a raw material in manufacturing Ferroalloys.

In the year 2016, the Company took over the ferroalloy plant and leased mines of M/s Raghuvir Ferro Alloys Private Limited. The Company has not yet started extraction of manganese ore from these mines as the transfer of said mines to the name of the company in records of State Govt of Madhya Pradesh is yet pending.

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its needs for working capital (Rs. 6.78 cr.), general corporate purpose (Rs. 1.85 cr.), JFAL is coming out with a maiden IPO of 2802000 equity shares of Rs. 10 each at a price of Rs. 70 per share to mobilize Rs. 19.61 cr. The issue consists of a fresh equity issue worth Rs. 9.11 cr. (1302000 shares) and offer for sale (OFS) worth Rs. 10.50 cr. (1500000 shares). The issue opens for subscription on September 28, 2021, and will close on September 30, 2021. Minimum application is to be made for 2000 shares and in multiples thereon, thereafter. Post allotment shares will be listed on NSE Emerge. The issue constitutes 26.53% of the post issue paid-up capital of the company. JFAL will spend Rs. 1.04 cr. for this IPO process (including Rs. 0.49 cr. for fresh equity issue). Thus the issue is fully structured with required subscriptions.

The issue is solely lead managed by Hem Securities Ltd. and Bigshare Services Pvt. Ltd. is the registrar to the issue. Hem Finlease Pvt. Ltd. is the market maker for this issue. 

After the initial equity issue at par, the company raised further equity in the price range of Rs. 22.00 and Rs. 22.35 between June 2016 and March 2017. It has also issued bonus shares in the ratio of 7 for 5 in August 2018. The average cost of acquisition of shares by the promoters is Rs. 8.92 and Rs. 9.31 per share. 

Post issue, JFAL's current paid-up equity capital of Rs. 9.26 cr. will stand enhanced to Rs. 10.56 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 73.93 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, JFAL has posted turnover/net profits of Rs. 132.40 cr. / Rs. 2.89 cr. (FY19), Rs. 122.34 cr. / Rs. 0.86 cr. (FY20) and Rs. 102.52 cr./ Rs. 3.12 cr. (FY21). Though its topline has shown declining trends, its bottom line remained inconsistent with super earnings in FY21 (a pandemic year). 

For the last three fiscals, it has posted an average EPS of Rs. 2.52 and an average RoNW of 10.51%. The issue is priced at a P/BV of 2.71 based on its NAV of Rs. 25.81 as of March 31, 2021, and at a P/BV of 2.24 based on post issue NAV of Rs. 31.26. 

If we attribute FY21 earnings on fully diluted post issue equity, then the asking price is at a P/E of around 23.73. 

COMPARISON WITH LISTED PEERS:
As per offer documents, JFAL has shown Maithan Alloy and Shyam Century as its listed peers. They are currently trading at a P/E of 9.24 and 10.29 (as of September 24, 2021). However, they are not truly comparable on an apple to apple basis. 

DIVIDEND POLICY:
The company has not declared any dividend in the last five fiscals. However, it will adopt a prudent dividend policy post listing based on its financial performance and future prospects. 

MERCHANT BANKER'S TRACK RECORDS:
This is the 12th mandate from Hem Securities in the last three fiscals (including the ongoing one). While the last mandate of Prevest is yet to be listed, out of the last 10 listings, 1 opened at discount, 3 at par and the rest with premiums ranging from 0.4% to 37.2% on the day of listings.