Magenta Life BSE SME IPO review (May apply)

•    MLL is engaged in the manufacturing and marketing of foam-based products.
•    It has posted static performance for the reported periods.
•    The company is operating in a highly competitive and fragmented segment. 
•    Based on FY24 annualized earnings, the issue appears aggressively priced. 
•    With asset light model and cost management, the management is confident of improving its performance going forward.
•    Well-informed/cash surplus investors may park funds for the long term. 

ABOUT COMPANY:
Magenta Lifecare Ltd. (MLL) is the manufacturer of foam-based product such as mattresses and pillows which is marketed under our brand "Magenta" in India. Its Product offerings include wide range of mattresses such as memory foam, latex based, bonded mattresses, pocketed spring etc. and pillows such as memory foam pillow, molded memory foam pillow, molded contour foam pillow etc. 

Its success is attributable to the quality of products that MLL offers to customers, spread across retail, hotels and institutions. Driven by innovation, it strives to introduce new and innovative products on a continuous basis with the help of its team. It has introduced green tea and bamboo hydraulic bed) which it imports under own brand Magenta. 

MLL has developed distributor and dealer/retailer network across multiple states in India. It also sells products through offline channel of multi brand outlet and through a network of dealers and also through online e-commerce platform. As of the date of this offer document, it had 41 employees on its payroll. The company is operating an asset light model coupled with cost management in a highly competitive and fragmented segment and that holds the key.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden IPO of 2000000 equity shares of Rs. 10 each at a fixed price of Rs. 35 per share to mobilize Rs. 7.00 cr. The issue opens for subscription on June 05, 2024, and will close on June 07, 2024. The minimum application to be made is for 4000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. The issue constitutes 29.11% of the post-IPO paid-up capital of the company. The company is spending Rs. 1.02 cr. for this IPO process, and from the net proceeds of the IPO, it will utilize Rs. 4.24 cr. for working capital, and Rs. 1.74 cr. for general corporate purposes. 

The issue is solely lead managed by Fedex Securities Pvt. Ltd., and Cameo Corporate Services Ltd. is the registrar to the issue. Sunflower Broking Pvt. Ltd. is the market maker for the company. The issue is underwritten to the tune of 85% by Sunflower Broking and 15% by Fedex Securities. 

Having issued initial equity capital at par, it issued further equity share in the price range of Rs. 100 - Rs. 110 per share between December 2021 and May 2023. It has also issued bonus shares in the ratio of 2 for 1 in June 2023. The average cost of acquisition of shares by the promoters is Rs. 7.50, and Rs. 8.74 per share. 

Post-IPO, company's current paid-up equity capital of Rs. 4.87 cr. will stand enhanced to Rs. 6.87 cr. Based on the upper IPO price band, the company is looking for a market cap of Rs. 24.04 cr.  

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has posted a total income/net profit of Rs. 9.66 cr. / Rs. 0.19 cr. (FY21), Rs. 9.39 cr. / Rs. 0.19 cr. (FY22), and Rs. 9.55 cr. / Rs. 0.25 cr. (FAY23). For 9M of FY24 ended on December 31, 2023, it earned a net profit of Rs. 0.24 cr. on a total income of Rs. 6.31 cr. 

For the last three fiscals, it has reported an average EPS of Rs. 0.50, and an average RoNW of 6.37%. The issue is priced at a P/BV of 2.68 based on its NAV of Rs. 13.07 as of December 31, 2023, and at a P/BV of 1.80 based on its post-IPO NAV of Rs. 19.47 per share.

If we attribute annualized FY24 earnings to its post-IPO fully diluted paid-up capital, then the asking price is at a P/E of 74.47. Thus the IPO appears aggressively priced. According to the management, since it is having an asset light model and their adhering to cost management plans, it marked improvement in its margins and the trends are likely to see further improvement. 

For the reported periods, the company has posted PAT margins of 2.02% (FY21), 2.04% (FY22), 2.71% (FY23), 4.05% (9M-FY24), and RoCE margins of 7.64%, 8.95%, 11.86%, 13.41% respectively for the referred periods. 

DIVIDEND POLICY:
The company has not declared any dividends since incorporation. 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 Sheela Foam, and Tirupati Foam as their listed peers. They are trading at a P/E of 58.3, and 15.6 (as of May 31, 2024). However, they are not comparable on an apple-to-apple basis.

MERCHANT BANKER'S TRACK RECORD:
This is the 30th mandate from Fedex Securities in the last four fiscals (including the ongoing one), out of the last 11 listings, all listed with premiums ranging from 0.14% to 140.82% on the date of listing.