M V K Agro NSE SME IPO review (May apply)

•    The company is an integrated sugar and other allied product manufacturer.
•    It marked inconsistency in its top and bottom lines for the reported periods. 
•    Based on FY24 annualized super earnings, the issue appears aggressively priced. 
•    Post expansion, it is likely to reap more benefits as claimed by the management. 
•    Well-informed/cash surplus investors may park funds for the medium to long term rewards.

ABOUT COMPANY:
MVK Agro Food Product Ltd. (MAFPL) is an integrated sugar and other allied products manufacturing company operating from Nanded District in the State of Maharashtra. It operates a single location sugar unit having licensed crushing capacity of 2,500 TCD. In addition to sugar the company also commercialize and sell by-products and waste products, namely, Molasses, Bagasse and Pressmud. 

MAFPL is also engaged in the generation of Power for captive consumption. Its business can hence be broken up into two segments, namely Sugar and its by-products/waste products. In the year 2020, it commenced operations of manufacturing of Sugar. In the year 2020, the Company implemented backward integration and began commercial operations of the by-products and waste products of Sugar along with Co-Generation capabilities. 

The Company proposes to further diversify its product portfolio by setting up a greenfield unit for manufacturing Ethanol and Bio-CNG and Fertilizer. Ethanol is produced after fermentation and distillation of Molasses and can be further purified into Fuel Ethanol, by removing the water content. It intends to create an additional revenue stream using backward integration of waste material, i.e., Molasses for manufacturing Ethanol and marketing and selling the same for industrial usage. Further, in the said greenfield unit, the company proposes to set up a separate bio CNG bottling and fertilizer plant for bio-gas generation and bottling. The by-product generated from the manufacturing of bio-gas is mainly used as a fertilizer, therefore the Company proposes to market and sell such by-product as a fertilizer to third parties. 

It proposes to generate bio-gas by processing Bagasse and Pressmud further marketing and selling the same for industrial usage. As of September 30, 2023, it had 161employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden IPO of 5490000 equity shares of Rs. 10 each at a fixed price of Rs. 120 per share to mobilize Rs. 65.88 cr. The issue opens for subscription on February 29, 2024, and will close on March 04, 2024. The minimum application to be made is for 1200 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 35.44% of the post-IPO paid-up capital of the company. The company is spending Rs. 7.63 cr. for this IPO process and from the net proceeds, it will utilize Rs. 52.38 cr. for setting up a greenfield unit at Nanded for Ethanol and bottling of bio-CNG and fertilizers, and Rs. 5.87 cr. for general corporate purposes.

The issue is solely lead managed by Horizon Management Pvt. Ltd. and MAS Services Ltd. is the registrar of the issue. Nikunj Stock Brokers Ltd. is the market maker for the company. 

The company has issued entire equity capital at par value so far and has also given bonus shares in the ratio of 1 for 1 in December 2023. The average cost of acquisition of shares by the promoters is Rs. 2.71, Rs. 6.66, Rs. 7.25, and Rs. 9.95 per share. 

Post-IPO, company's current paid-up equity capital of Rs. 10.00 cr. will stand enhanced to Rs. 15.49 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 185.88 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has (on a standalone basis) posted a total income/net profit of Rs. 25.83 cr. / Rs. 1.40 cr. (FY21), Rs. 132.64 cr. / Rs. 3.20 cr. (FY22), and Rs. 93.94 cr. / Rs. 3.77 cr. (FY23). For H1 of FY24 ended on September 30, 2023, on a consolidated basis, it earned a net profit of Rs. 4.30 cr. on a total income of Rs. 60.44 cr. Thus it expressed inconsistency in its top and bottom lines. In particular, its bottom line surge from FY23 onward raise eyebrows. 

For the last three fiscals, the company has reported an average EPS of Rs. 3.23 and an average RoNW of 35.66%. The issue is priced at a P/BV of 3.40 based on its NAV of Rs. 35.35 as of September 30, 2023, and at a P/BV of 2.22 based on its post-IPO NAV of Rs. 53.94. 

If we attribute FY24 annualized super earnings to its post-IPO fully diluted paid-up equity capital, then the asking price is priced at a P/E of 21.62. Thus the issue appears aggressively priced. The management is confident of maintaining the trends in coming years with additional revenue from the proposed expansions. 

For the reported periods, the company has posted PAT margins of 6.11% (FY21), 2.45% (FY22), 4.05% (FY23), 7.15% (H1-FY24), and RoCE margins of 5.98%, 14.49%, 13.44%, 14.09% respectively for the referred periods. 

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 Ugar Sugar, Dwarikesh Sugar, Balrampur Chini and Dhampur Sugar as their listed peers. They are trading at a P/E of 13.7, 14.1, 13.1, and 11.6 (as of February 23, 2024). However, they are not comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
This is the 3rd mandate from Horizon Management in the ongoing fiscal. Out of the last 2 listings, 1 opened at discount and 1 at par. Thus it has a poor track record.