Madhav Copper NSE SME FPO review (Avoid)

•    MCL is engaged in the manufacturing variety of copper products for industrial use.
•    It issued two bonus issues i.e. 2 for 1 (Sept. 18) and 1 for 1 (post-split).
•    Face value of shares split from Rs. 10 to Rs. 5 in Oct. 2019.
•    Chances of market operation to lure investors for this FPO subscription not ruled out.
•    Based on its current financial data, the issue is priced aggressively.

PREFACE:
MCL came with its maiden IPO of 553600 shares for NSE SME listing in January 2017. At that time it had fixed the issue price at Rs. 81 per share (of Rs. 10 face value) and mobilized Rs. 4.48 cr. Thereafter, it has issued bonus shares in the ratio of 2 for 1 and 1 for 1share held and also split the face value of its shares from Rs. 10 to Rs.5 per share.  Now it is coming out with FPO of 2499600 shares of Rs.5 with a price band of Rs. 100 - Rs. 102 per share.

ABOUT THE COMPANY:
Madhav Copper Ltd. (MCL) is ISO 9001:2015 and 14001:2015 certified company, engaged in the business of manufacturing of copper wire, copper rods, copper bus bars, flats, profiles, sections, strips, anodes & rods, enameled copper wires and submersible winding wires. The copper material, which the company produces, achieves an electrical conductivity of 101% IACS (International Annealed Copper Standard) and has electrical and mechanical properties suitable for applications in power generation, transmission, distribution and electronic industries.

The Copper Conductors are manufactured from 99.997% of pure ETP and OFC grade copper and insulated with high thermal class engineered insulation material, which provides excellent dielectric properties and excellent resistance to cracking.

Incorporated in the year 2012, MCL got listed its Equity Shares on NSE EMERGE in the year 2017 to raise funds for the working capital requirement and enhance brand name and corporate image to create public visibility of the Company. In the year 2018, Company has announced the expansion of business and new product introduction in their existing product portfolio i.e. Copper Bus Bars, Profile, Copper Stripes, Oxygen Free Copper Rod, Paper Insulated Copper Conductor, Fiber Glass Copper Conductor, Mica Covered Copper Conductor.

Recently, the company has been approved by Indian railway for development, manufacture and supply of Dual coated enameled copper winding wire, Copper flat, Rectangular copper conductor, Rectangular Copper Strips, Oxygen-free Copper (OFC) Rods of various sizes and specification.

 
ISSUE DETAILS/CAPITAL HISTORY:
To part finance its plans for the purchase of plant and machinery (Rs. 6.49 cr.), Prepayment/repayment of certain secured borrowings Rs. 2.00 cr.), working capital needs (Rs. 11.00 cr.) and general corpus fund needs (Rs. 5.00 cr. approx), MCL is coming out with a fresh public offer(FPO) of 2499600 equity shares of Rs. 5 via book building route. It has fixed a price band of Rs. 100-Rs. 102 per share. MCL mulls raising Rs. 25 cr. to Rs.25.50 cr. via this FPO. The issue opens for subscription on 27.01.20 and will close on 30.01.20. Minimum application is to be made for 1200 shares and in multiples thereon, thereafter. This issue is solely lead managed by Pantomath Capital Advisors Pvt. Ltd. and Bigshare Services Pvt. Ltd. is the registrar to the issue. Pantomath Stock Brokers Pvt. Ltd. is the market maker for this issue. Post allotment, these shares will be listed on NSE SME Emerge. The issue constitutes 9.21% of the post issue paid-up equity capital.

Having issued initial equity at par, MCL issued fresh equity at Rs. 81 per share (FV Rs. 10 per share) in February 2017 via maiden IPO. It has issued bonus shares in the ratio of 2 shares for every 1 share held in September 2018 and 1 for 1 in October 2019 post-split. (The company split its face value from Rs. 10 to Rs. 5 in October 2019). The average cost of acquisition of shares by the promoters is Rs. 0.83 per share.
Post issue MCL's current paid-up equity capital of Rs. 12.32 cr. will stand enhanced to Rs.13.57 cr. The company is mulling market cap of Rs. 276.86 cr. with this issue.

FINANCIAL PERFORMANCE:
For the last three fiscals, MCL has posted turnover/net profits of Rs. 71.63 cr. / Rs. 0.86 cr. (FY17), Rs. 169.11 cr. / Rs. 1.96 cr. (FY18) and Rs. 213.05 cr. / Rs. 4.21 cr. (FY19). For the first half of FY20, it has earned a net profit of Rs. 2.60 cr. on a turnover of Rs. 94.34 cr. Thus sudden boost in bottom lines for the last two and a half year is a bit surprising.

For the last three fiscals, MCL has posted an average EPS of Rs. 1.18 and an average RoNW of 25.40%. The issue is priced at a P/BV of 15.96 on the basis of its NAV of Rs. 6.39 as on 30.09.19.

If we annualize latest earnings and attribute it on fully diluted equity post issue, then asking price is at a P/E of around 53+. Thus the issue is aggressively priced against the industry average of 16+.
This scrip is quoting around Rs. 121 the leads to suspect market operation to lure investors for this aggressively priced FPO.   

COMPARISION WITH LISTED PEERS:
As per offer documents, MCL has shown Precision Wires, Ram Ratna Wire and Hindustan Copper as its listed peers. They are currently trading at a P/Es of around 10.19, 12.01 and 36 (as on 23.01.20). However, they are not strictly comparable.

PERFORMANCE OF LEAD MANAGER:
On lead manager front, this is the 60th mandate from its stable in the last three fiscals (including the ongoing fiscal). Out of last 10 listings, one opened at a discount (Suich Ind.) and the rest opened at a premium ranging from 0.21% to 11.11% on the day of listing. Thus it has average track records.