Megastar Foods BSE SME IPO review (May apply)

Megastar Foods Ltd. (MFL) is engaged in the manufacturing of food based products such as wheat flour, organic wheat flour products and allied flour products. Basically, company produces food products related to wheat i.e. Atta-wheat flour products, Maida-Fine wheat flour products, Suji/Rawa-Semolina, Chokar/Wheat Bran, Organic Atta, Organic whole Wheat flour and Organic wheat flour etc. MFL is an FSSC 22000 certified company for food safety systems including ISO 22000:2005, ISO 22002-1:2009 and additional FSSC 22000 requirements in respect of Processing (Pre Cleaning, Cleaning, milling, Sifting) of Wheat products like Atta, Maida, Suzi, Bran and its packaging in HDPE laminated bags and Poly Pouch bags by Intertek Certification Limited, United Kingdom. MFL is having FSSAI license, Organic Certificate for in accordance with the requirements of India’s National Programme for Organic Production Standards by the Ecocert India Pvt. Limited, HALAL certified by HALAL India Pvt. Ltd etc. Company is having state of the art modern machinery in its wheat processing plant in Punjab, India, with an installed capacity of 81000 MT per year. At present MFL is catering majorly to MNC’s in India and also exporting some of its products to United Nations Organization, Europe, United States & Middle East.

To part finance its working capital and general corporate fund needs,  MFL is coming out with a maiden IPO of 2680000 equity shares of Rs. 10 each at a fixed price of Rs. 30 per share to mobilize Rs. 8.04 crore. Issue opens for subscription on 14.05.18 and will close on 16.05.18. Minimum application is to be made for 4000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. Issue is solely lead managed by Swastika Investmart Ltd. and Skyline Financial Services Pvt. Ltd. is the registrar to the issue. Issue constitutes 27.06% of the post issue paid up capital of the company. Entire equity is issued at par by the company so far and has also issued bonus shares in the ratio of 21 for 100 in March 2018. Average cost of acquisition of shares by the promoters is Rs. 7.65 and Rs. 8.87 per share. Post issue, its current paid up equity capital of Rs. 7.22 cr. will stand enhanced to Rs. 9.90 cr.

On performance front, for last four fiscals, MFL has posted turnover/net profits of Rs. 7.85 cr. / Rs. –(0.001) cr. (FY14), Rs. 44.50 cr. / Rs. – (0.28) cr. (FY15), Rs. 78.04 cr. / Rs. 0.59 cr. (FY16) and Rs. 97.76 cr. / Rs. 1.06 cr. (FY17). For first nine months ended on 31.12.17 of FY18 it has earned net profit of Rs. 0.87 cr.   on a turnover of Rs. 78.37 cr. For last three fiscals it has posted an average EPS of Rs. 1 per share and an average RoNW of 9.52%. Issue is priced at a P/BV of 2.18 on the basis of NAV of Rs. 13.75 as on 31.12.17 and at a P/BV of 1.83 on the basis of post issue NAV of Rs. 16.40. If we annualize latest earnings and attribute it on fully diluted equity post issue then asking price is at a P/ E of around 25 plus against industry average of 38. As per offer documents it has shown DFM Food as its listed peer which is trading at a P/E of around 65 (as on 11.05.18). Thus issue appears reasonably priced.

On merchant banker’s front, this is 14th mandate from its stable in last three fiscals. Out of last 10 listings, 2 opened at a discount to offer price and the rest with a premium ranging from 2.8% to 20% on the day of listing.