Kahan Packaging BSE SME IPO review (Avoid)

•    KPL is in the business of manufacturing and marketing PP, and HDPE packaging materials.
•    It is operating in a highly competitive and fragmented segment. 
•    The sudden boost in its bottom line for FY23 raised eyebrows and concern over sustainability.
•    Based on FY23 super earnings, the issue appears greedily priced. 
•    The tiny equity capital post-IPO indicates longer gestation for migration to the mainboard.
•    There is no harm in skipping this greedily priced issue. 

PREFACE:
Though this company's IPO prospectus is dated August 31, 2023, and its IPO ad appeared on the same date, the offer documents were not uploaded on any public domain till this morning i.e. September 04, 2023. On request, the link was shared by the company people for the same. Is this permissible under compliance?

ABOUT COMPANY:
Kahan Packaging Ltd. (KPL) is in the business of manufacturing and supplying Polypropylene (PP)/ High Density Polyethylene (HDPE) Woven Fabric- Laminated, HDPE/PP woven sacks, Woven Fabric- Un- Laminated, PP Woven Bags, PP Woven Bags with Liner, Printed Laminates for Flexible Packaging, woven polymer based products of different weight, sizes and colors as per customer's specifications. It offers customized bulk packaging solutions to business-to-business ("B2B") manufacturers catering to different industries such as Agro Pesticides Industry, Cement Industry, Chemical Industry, Fertilizer Industry, and Food Products Industry.

HDPE/PP are two commonly used materials in the bulk packaging industry due to their benefits which include durability, lightweight, versatility, recyclability, chemical resistance, moisture resistance, cost-effective, and high tear resistance which has a lower carbon footprint during transportation due to its lightweight nature. Presently, the installed production capacity of Factory-I for woven fabrics is 2,600 m.t. p.a. which is located in Asangaon, Maharashtra. Over the years, the company has made investments, from time to time, in its manufacturing infrastructure to support product portfolio requirements. Recently, the Company has expanded its business by setting up a new manufacturing unit and installing Multi colour (up to 8 Color) Roto-Gravure Printing Machine for flexible packaging and printing processes including polyester, Nylon, BOPP, Foil, low and high-density polyethylene polypro plane and paper with two-sided printing facilities with high-speed hot air dryers with an installed production capacity of 500 m.t. p.a. 

All products are manufactured in-house at its manufacturing units located amalgamated Inds Estate, Near Diamond Hotel, Mumbai- Nashik Highway, Asangaon, Tal. Shahpur, Dist. Thane - 421601, Maharashtra, which enables it to have effective control over the manufacturing process, to ensure consistent quality of products and minimise production time and bring cost-effectiveness. The manufacturing units of our Company are constructed on well-developed land. As of May 31, 2023, it had 8 employees on its payroll. The company is operating in a highly competitive and fragmented segment. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden IPO of 720000 equity shares of Rs. 10 each at a fixed price of Rs. 80 per share to mobilize Rs. 5.76 cr. The issue opens for subscription on September 06, 2023, and will close on September 08, 2023. 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 26.47% of the post-IPO paid-up equity capital of the company. KPL is spending Rs. 0.82 cr. (14.23%) for this IPO process and from the net proceeds, it will utilize Rs. 4.00 cr. for working capital and Rs. 0.94 cr. for general corporate purposes. The issue expenses indicate a fully structured mode of the IPO.

The company has allocated 40000 shares for market makers, 340800 shares for Retail, and 339200 shares for HNI Investors. 

Hem Securities Ltd. is the sole lead manager and Purva Sharegistry (India) Pvt. Ltd. is the registrar of the issue. Hem Group's Hem Finlease Pvt. Ltd. is the market maker for the company. 

The company has issued entire equity shares at par value so far and has issued bonus shares in the ratio of 1 for 1 in March 2023. The average cost of acquisition of shares by the promoters is Rs. 7.50 per share. 

Post-IPO, KPL's current paid-up equity capital of Rs. 2.00 cr. will stand enhanced to Rs. 2.72 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 21.76 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, KPL has posted a total income/net profit of Rs. 12.13 cr. / Rs. 0.02 cr. (FY21), Rs. 15.91 cr./ Rs. 0.20 cr. (FY22), and Rs. 17.56 cr. / Rs. 1.03 cr. (FY23). Though its top line marked steady growth, the sudden boost in the bottom line for FY23 raised eyebrows and it appears to be a window dressing to fetch fancy valuations for the IPO. 

For the last three fiscals, KPL has reported an average EPS of Rs. 5.86 and an average RoNW of 39.90%. The issue is priced at a P/BV of 4.63 based on its NAV of Rs. 17.29 as of March 31, 2023, and at a P/BV of 2.56 based on its post-IPO NAV of Rs. 31.21 per share. 

If we attribute the super earnings of FY23 to the post-IPO fully diluted paid-up equity capital of the company, then the asking price is at a P/E of around 21.10. Thus the IPO appears greedily priced. 

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

COMPARISON WITH LISTED PEERS:
As per the offer document, KPL has shown Sah Polymers, Rishi Techtex and Uflex as their listed peers. They are currently trading at a P/E of 119.39, 14.46, and 15.27 (as of September 04, 2023). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
This is the 27th mandate from Hem Securities in the last three fiscals (including the ongoing one). Out of the last 10 listings, all are listed with premiums ranging from 1.82% to 90% on the date of listing.