Mahickra Chemicals NSE SME IPO review (Avoid)

Mahickra Chemicals Ltd. (MCL) is in the business of manufacturing of Reactive Dyes since year 1998, while the business of trading in Reactive Dyes was started in year 1994. The Company manufactures Reactive Dyes also known as Synthetic Organic Dyes (S.O. Dyes) and has an integrated process. The company specializes in Black Reactive Dyes. It manufactures 40 various types of Reactive Dyes. The product of the company caters to textiles & garments manufacturers. The company also offers specialty performance chemicals to the Textile Dyeing and printing industry. The company has a production capacity of approx. 900 tons per annum. The manufacturing facility of the company is situated at Vatva GIDC in Gujarat. MCL is an ISO 9001:2015, ISO 14001:2015 and GOTS certified company certifying the quality of the product it manufactures.

To part finance its working capital and general corpus fund needs, MCL is coming out with a maiden IPO of 2100000 equity shares of Rs. 10 each via book building route with a price band of Rs.24 – Rs. 25 to mobilize Rs. 5.04 to Rs. 5.25 crore (based on lower and upper price bands). Issue opens for subscription on 16.04.18 and will close on 18.04.18. Minimum application is to be made for 6000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge.  Issue is solely lead managed by Pantomath Capital Advisors Pvt. Ltd. and Bigshare Services Pvt. Ltd. is the registrar to the issue. Issue constitutes 29.05% of the post issue paid up capital of the company. Having raised initial equity at par it raised further equity in the price range of Rs. 20 and Rs. 24 in December 2017 and January 2018 respectively. Average cost of acquisition of shares by the promoters is Rs. 10 and Rs. 11.33 per share. Post issue, MCL's current paid up capital of Rs. 5.13 crore will stand enhanced to Rs. 7.23 crore.

On performance front, MCL has posted turnover/net profits of Rs. 43.56 cr. / Rs. 0.17 cr. (FY14), Rs. 42.75 cr. / Rs. 0.09 cr. (FY15), Rs. 34.79 cr. / Rs. 0.15 cr. (FY16) and Rs. 42.26 cr. / Rs. 0.35 cr. (FY17). For the current fiscal it has shown two breaking periods of performance from 01.04.17 to 12.11.17 and from 13.11.17 to 31.12.17. It we combined both then it has earned net profit of Rs. 0.36 cr. on a turnover of Rs. 40.90 crore for first nine months. It suffered a setback in top line for FY 16 and sudden jump in bottom line for FY 17 raising concern. Except FY16, its top line remained mostly static between FY14 and FY17. For last three fiscals it has posted an average EPS of Rs. 0.73 and an average RoNW of 11.62%. Issue is priced at a P/BV of 1.88 based on its NAV of Rs. 13.27 as on 31.12.17. If we annualize latest earnings and attribute it on fully diluted equity post issue, then asking price is at a P/E of around 37 plus against industry average of 27. Thus issue is priced very aggressively. Its listed peers are trading at a P/E of around Aksharchem (14), Kiri Ind. (12), Camex (34) and Meghmani Orga (31) – (as on 05.04.18 closing on BSE). Company is having higher inventory carry over and is mounting year on year that raises concern.

On merchant banker's front, this is the 68th mandate since fiscal 2015-16. Out of last 10 listings (including that of Benara Bearings) 1 opened at a discount and the 8 at a premium ranging from 1.6% to 20% on SME platform and 1 at a premium of  130% on main board on the day of listing.