Khazanchi Jewellers BSE SME IPO review (Avoid)

•    KJL is a south-centric player in Indian jewellery, a highly competitive segment.
•    It has posted impressive financial performance for the reported periods. 
•    The company converted loans of promoters at a price of Rs. 35 in May 2023.
•    The issue is exorbitantly priced even on the basis of FY23 super financial data.
•    There is no harm in skipping this pricey IPO.

ABOUT COMPANY:
Khazanchi Jewellers Ltd. (KJL) is a prominent player in the Indian jewellery industry, with a strong presence in both wholesale and retail sectors. It specializes in the production and sale of a wide range of jewellery products, including gold jewellery, diamond jewellery, precious stones, and other fancy jewellery and bullion in the form of coins and bars. 

KJL's jewellery business has a rich history spanning over three decades in the Indian jewellery industry. It offers a diverse range of jewellery products and is dedicated to designing, manufacturing, and selling high-quality jewellery that includes necklaces, chains, rings, earrings, bangles, bracelets, pendants, nose pins, manga sutras, and kadas Its focus is on creating exquisite wedding jewellery and other pieces suitable for festive occasions. 

As of the date of this Prospectus, it had one showroom located at No. 130, NSC Bose Road, Sowcarpet Chennai 600079, Tamil Nadu, India. The company intends to establish one more showroom at 286, NSC Bose Road, Sowcarpet, Chennai 600079, by the financial year 2024-25 and is being funded from the IPO proceeds. As of June 30, 2023, it had 33 employees on its payroll.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden IPO of 6910000 equity shares of Rs. 10 each at a fixed price of Rs. 140 per share to mobilize Rs. 96.74 cr. The issue opens for subscription on July 24, 2023, and will close on July 28, 2023. The minimum application to be made is for 1000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. The issue constitutes 27.92% of the post-IPO paid-up capital of the company. KJL is spending Rs. 1.12 cr. for this IPO process, and from the net proceeds, it will use Rs. 8.62 cr. for capital expenditure on the new showroom, Rs. 20.00 cr. for inventory cost of the new showroom, Rs. 55.00 cr. for working capital, and Rs. 12.00 cr. for general corporate purposes. 

Mark Corporate Advisors Pvt. Ltd. is the sole lead manager and Cameo Corporate Services Ltd. is the registrar of the issue. SVCM Securities Pvt. Ltd. is the market maker of the company. 

Having issued initial equity shares at par, the company issued/converted further equity shares in the price range of Rs. 35 to Rs. 50 between March 2005 and May 2023. It also issued bonus shares in the ratio of 2 for 1 in March 2011. The average cost of acquisition of shares by the promoters is Rs. 11.51, Rs.12.46, Rs. 17.89, Rs. 21.46, and Rs. 23.47 per share. 

Post-IPO, KJL's current paid-up equity capital of Rs. 17.84 cr. will stand enhanced to Rs. 24.75 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 346.46 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, KJL has posted a turnover/net profit of Rs. 382.43 cr. / Rs. 2.76 cr. (FY21), Rs. 258.00 cr. / Rs. 3.27 cr. (FY22), and Rs. 481.82 cr. / Rs. 7.57 cr. (FY23). According to the management, it suffered a setback in the top line for FY22 in line with the general trends for the industry, post the pandemic. 

For the last three fiscals, it has reported an average EPS of Rs. 5.37 and an average RoNW of 16.09%. The issue is priced at a P/BV of 3.86 based on its NAV of Rs. 36.30 as of March 31, 2023, and at a P/BV of 2.16 based on its post-IPO NAV of Rs. 64.84 per share. 

If we attribute FY23 super earnings to post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 45.75. Thus the issue is exorbitantly priced. 

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. 

COMPARISON WITH LISTED PEERS:
As per the offer document, the company has shown Deep Diamond, Eighty Jewellers and Moksh Ornaments as their listed peers. They are currently trading at a P/E of 16.9, 35.25, and 9.61 (as of July 19, 2023). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
This is the 3rd mandate from Mark Advisors in the last three fiscals (including the ongoing one). Out of the last 2 listings, 1 opened at par and 1 with a premium of 2.5% on the listing date. Thus the lead manager has a poor track record.