Ken Enterprises NSE SME IPO review (May apply)

•    The company is in textile manufacturing and marketing with major operations from third party job contracts.
•    It posted steady growth in its top lines for the reported periods.
•    The sudden boost in bottom line in pre-IPO periods raises eyebrows and concern over its sustainability as it is operating in a highly competitive and fragmented segment.
•    Higher margins reported by it compared to its listed peers’ surprises one and all.
•    Based on its recent financial performance, the issue appears aggressively priced.
•    Well-informed investors may park funds for medium to long term.

ABOUT COMPANY:
Ken Enterprises Ltd. (KEL) is an ISO 9001:2015 certified and has won several awards from the cotton textiles exports promotion council (Texprocil) over the past several years. The Company has over twenty years of experience in the field of textile manufacturing. It operates as a design-to-delivery solutions provider for both greige and finished fabrics catering to the domestic as well as export markets. The company exports regular and sustainable greige and finished fabrics in 10+ number of countries. It is approved vendors for leading international brands such as ZARA (Inditex Group), Target and Primark. KEL offers a diverse range of fabrics such as structures, seer suckers, double layer, three layer, four layer, chambrays, fashion fabrics with metallic yarns etc, catering to various applications such as women fashion wear, men and kids’ shirts, home textiles, embroidery, light canvas etc amongst others.

It manufactures fabrics for apparel, industrial, technical, shirtings, home furnishings and other such purposes. It is availing third party manufacturers services for manufacturing of greige fabric on job work basis, in and around Ichalkaranji, Maharashtra which is fabric weaving ecosystem, for boosting manufacturing capacities. This business model has worked very well for the company since past several years wherein it has been able to achieve higher sales by availing third party manufacturers services, as the same does not require any capital expenditure from the company. It has developed business relationships with several manufacturers in and around Ichalkaranji by giving them regular job work orders. The company can anytime add further capacities by developing business relationship with such additional manufacturers giving it the flexibility to focus on product development and sales.

The company is into manufacturing of greige fabrics. Taking advantage of its location at Ichalkaranji, which is a known textile hub, it has been following a business model of getting most of the greige fabric manufactured from third party greige fabric manufacturers on job work basis, who are abundantly available in and around its location. The company has been following such business practice since past several years wherein most of its revenues are generated from selling greige fabric which is manufactured by third party manufacturers. The company has not got into any formal agreements with any third party manufacturers due to its long standing relationships with them.

KEL has an asset-light business model, capitalizing on the fabric weaving ecosystem in Ichalkaranji, Maharashtra. This approach enables it to produce a diverse range of cotton and multi-fiber fabrics for both domestic and international markets, with a specialization in made-to-order fabrics for various applications such as apparel, home textiles, and industrial use across multiple widths from 18” inches to 148” inches wide. Its business model emphasizes on quality and customer satisfaction in supplying regular and sustainable greige and finished fabrics on order-to-order basis. The product portfolio encompasses greige, dyed (being supported by third parties), printed and ready for dyeing (RFD)/prepared for dyeing (PFD) fabrics. The company maintains high quality standards and due to its experience has the capability to manufacture customer specific products. As of December31, 2024, it had 228 employees on its payroll.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden combo IPO of 8899200 equity shares of Rs. 10 each at a fixed price of Rs. 94 per share to mobilize Rs. 83.65 cr. The issue opens for subscription on February 05, 2025, and will close on February 07, 2025. The minimum number of shares to be applied is for 1200 shares and in multiples thereon, thereafter. The issue consists of 6199200 fresh equity shares worth Rs. 58.27 cr., and an Offer for Sale (OFS) of 2700000 shares (worth Rs. 25.38 cr.). Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 36.23% of the post-IPO paid-up capital of the company. The company is spending Rs. 5.24 cr. for this IPO process, and from the net proceeds of the issue, the company will utilize Rs. 6.25 cr. unidentified acquisitions in India and abroad, Rs. 4.53 cr. for purchase of new machinery, Rs. 25.00 cr. for working capital, Rs. 3.77 cr.  for capex on renovation of both manufacturing units, and Rs. 13.48 for general corporate purposes. 

The IPO is solely lead managed by Corporate Makers Capital Ltd., and Skyline Financial Services Pvt. Ltd., is the registrar to the issue. Giriraj Share Broking Pvt. Ltd., is the Market Maker for the company. The issue is underwritten to the tune of 15% by Corporate Makers and 85% by Giriraj Stock Broking. 

Having issued/converted initial equity shares at par value, the company issued further equity shares in the price range of Rs. 114.05 – Rs. 125.00 per share between January 2013, and March 2016. It has also issued bonus shares in the ratio of 61 for 10 in May 2024. The average cost of acquisition of shares by the promoters is Rs. 1.03, and Rs. 5.30 per share. 

Post-IPO, company’s current paid-up equity capital of Rs. 18.37 cr. will stand enhanced to Rs. 24.57 cr. Based on the upper price band of the IPO, the company is looking for a market cap of Rs. 230.92 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has (on a consolidated basis) posted a total income/net profit of Rs. 360.32 cr. / Rs. 2.37 cr. (FY22), Rs. 375.23 cr. / Rs. 3.95 cr. (FY23), and Rs. 409.13 cr. / Rs. 8.93 cr. (FY24). For 8M of FY25 ended on November 30, 2024, it earned a net profit of Rs. 9.53 cr. on a total income of Rs. 332.85 cr. Boosted profits in pre-IPO periods raises eyebrows and concern over its sustainability. Perhaps there appears to be a window dressing to fetch fancy valuations. PAT margins posted by the company are much higher than the peers and raises concern over its sustainability as it is operating in a highly competitive and fragmented segment.

For the last three fiscals, the company has reported an average EPS of Rs. 3.36 and an average RoNW of 14.85%. The issue is priced at a P/BV of 3.17 based on its NAV of Rs. 29.61 as of November 30, 2024, and at a P/BV of 2.15 based on its post-IPO NAV of Rs. 43.72 per share.

If we attribute FY25 annualized super earnings on post-IPO fully diluted equity capital, then the asking price is at a P/E of 16.15. Based on FY24 earnings, the P/E stands at 25.90. Based on its recent earnings, the issue relatively appears aggressively priced. 

According to the management, their higher margins are attributed to its cost controlled operations and asset-light model of business. Its global customer list includes renowned names.

For the reported periods, the company has posted PAT margins of 0.67% (FY22), 1.08% (FY23), 2.22% (FY24), 2.92% (8M-FY25), and RoCE margins of 33.41%, 32.58%, 51.52%, 40.24%, for the referred periods, respectively.

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 Laxmi Cotspin and Pashupati Cotspin as their listed peers. They are trading at a P/E of NA, and 58.7 (as of January 31, 2025). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER’S TRACK RECORD:
This is the 1st mandate from Corporate Maker in the ongoing fiscal.  Hence it has no past track record.