Kalyani Cast BSE SME IPO review (May apply)

•    KCTL is in the business of castings and containers for all short of industries including railways. 
•    The company marked growth in its top lines, but quantum jump in bottom lines for the last 15 months raises eyebrows. 
•    Based on its FY24 annualized super earnings, the issue appears reasonably priced, but the sustainability of such margins going forward is a major concern. 
•    Well-informed investors may consider parking of moderate funds for the long-term rewards. 

ABOUT COMPANY:
Kalyani Cast-Tech Ltd. (KCTL) that started with the business of castings and had MG Coupler components, CI Brake Blocks, Adapter for WEG4 Loco, Bearing Housing for Electrical Loco, Corner castings etc., to cater requirements of Indian Railways, mining industries, Cement industries, chemicals and fertilizers, power plants etc. 

Post 2018, it also ventured in to business of manufacturing containers for railways. It manufactures wide product range of castings for all short of containers. The company adopted no-bake systems for moulding and with automatic sand plant. It is also involved in exports.

It aims to be one of the top design & manufacturing companies for steel, SG iron, cast iron components and manufacturing of ISO containers, development and manufacturing of special and customized containers. As of the date of filing this offer document, it had 138 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden book building route IPO of 2166000 equity shares of Rs. 10 each. It has announced a price band of Rs. 137 - Rs. 139per share and mulls raising Rs. 30.11 cr. at the upper cap. The issue opens for subscription on November 08, 2023 and will close on November 10, 2023. The minimum application to be made is for xxx shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. The issue constitutes 30.17% of the post-IPO paid-up equity capital of the company. From the net proceeds of the IPO funds, it will utilize Rs. 23.75 cr.  for working capital and the rest for general corporate purpose. 

After reserving 360000 shares (16.71%) for the market maker, the company has allocated not more than 50% for QIBs, not less than 15% for HNIs and not less than 35% for Retail investors. 

The issue is solely lead managed by Gretex Corporate Services Ltd., while Bigshare Services Pvt. Ltd. is the registrar of the issue. GRETEX group's Gretex Share Broking Ltd. is the market maker for the company. 

The company has issued entire equity share capital at par value so far. The average cost of acquisition of shares by the promoters is Rs. 10.00, Rs. 12.50, and Rs. 14.28 per share. 

Post-IPO, KCTL's current paid-up equity capital of Rs. 5.02 cr. will stand enhanced to Rs. 7.18 cr. Based on the upper cap of the IPO price, the company is looking for a market cap of Rs. 99.81 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has posted a total income/net profit of Rs. 11.35 cr. / Rs. 0.35 cr. (FY21), Rs. 49.47 cr. / Rs. 1.17 cr. (FY22), and Rs. 63.37 cr. 8.04 cr. (FY23). For Q1 of FY24 ended on June 30, 2023, it earned a net profit of Rs. 2.94 cr. on a total income of Rs. 24.68 cr. 

For the last three fiscals, KCTL has reported an average EPS of Rs. 8.93 and an average RoNW of 35.70%. The issue is priced at a P/BV of 4.06 based on its NAV of Rs. 34.25 as of June 30, 2023. The IPO price band ad is missing its post-IPO NAV data. 

If we annualize FY24 super earnings and attribute it to fully diluted post-IPO paid-up capital of the company, then the asking price is at a P/E of 8.49. Thus based on its recent super earnings, the issue appears reasonably priced, but sustainability of such margins raises concern. 

The company has posted PAT margins of 3.16% (FY21), 2.37% (FY22), 12.70% (FY23), and 11.92% (Q1-FY24), and RoCE margins of 5.60%, 18.18%, 67.56% and 20.20% for the corresponding periods respectively. Quantum jump in margins for the last 15 months' period raises eyebrows and concern over the sustainability of such earnings going forward as their peers are witnessing very low margins with continued pressure amidst rising competition. These financial performance appears to be the window dressing with super performance in pre-IPO period.

According to the management, spurt in margins are attributed to their specialized containers that enjoys higher margins as well as on the eased commodity prices post covid, since their contracts are based on fix pricing policy for the term of orders. The company has orders worth Rs. 97 cr. on hand at present.

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

COMPARISON WITH LISTED PEERS:
As per the offer document, the company has shown Texmaco Rail and Titagarh Rail as their listed peers. They are trading at a P/E of 62.59 and 43.29 (as of November 06, 2023). However, they are not comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
This is the 17th mandate from Gretex Corporate in the last three fiscals. Out of the last 10 listings, 3 opened at discount, 1 and par and the rest with premiums ranging from 1.31% to 90% on the day of listing.