Megatherm Induction NSE SME IPO review (May apply)

•    MIL is in the business of manufacturing and marketing of induction heating and melting products and related services. 
•    It marked steady growth in its top line, but bottom line fluctuated widely. 
•    The sudden boost in its bottom lines for the last 18 months raises eyebrows and the concern over its sustainability going forward.
•    Based on its annualized FY24 boosted earnings, the issue appears fully priced. 
•    Well-informed investors may park funds for the medium term. 

PREFACE:

We have yet another example of hush-hush filing of offer documents. Megatherm Induction and Harshdeep Hortico RHPs / IPO price band ads were filed with the IPO timeline from January 25, 2024 to January 30, 2024, but it remained modified to January 29, 2024 to January 31, 2024 for both and the dateline change ad was released in Business Standard dated January 23, 2024. Here no January 22, 2024 was involved, but still changed timeline has surprises one and all. This is how currently many LM works in a hurry and gives corrigendum. This definitely affects the reviewing and analysis reports.

ABOUT COMPANY:
Megatherm Induction Ltd. (MIL) is engaged in the business of manufacturing of induction heating and melting products by means of electric induction like induction melting furnace and induction heating equipment. Besides induction melting & heating equipments the company produces various up-stream & down-stream plant & machineries associated with steel melt shops such as, transformers, ladle refining furnaces, continuous casting machines, fume extraction systems etc. 

MIL also manufacturers electric arc furnaces for alloys & special steel making industries, its services portfolio includes turnkey solutions for steel plant, which involves design, engineering, supply, erection & commissioning of the steel melt shops using both insourced & outsourced plant & machineries and after sales service, involving maintenance contracts & spare parts business.

The company provides a complete solution to the customers for their steel making needs and include equipment's like transformers, induction melting furnaces, static frequency converters, water cooling plant, fume extraction system, ladle refining furnaces, continuous casting machines, in line induction billet heaters etc. As on December 31, 2023, it had an order book of approximately Rs. 280 cr. 

It exports products to South America (e.g. Argentina, Brazil, etc.), Africa (e.g. South Africa, Kenya, Tanzania, Ghana, Nigeria), Gulf (e.g. Saudi Arabia, UAE), Europe (e.g. Poland, France), SAARC (e.g. Bangladesh, Nepal, Bhutan) and South East Asia (e.g. Indonesia, Malaysia). As of September 30, 2023, it had 278 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden book building route IPO of 4992000 equity shares of Rs. 10 each (worth Rs. 53.91 cr. at the upper cap). It has announced a price band of Rs. 100 - Rs. 108 per share. The issue opens for subscription on January 29, 2024, and will close on January 31, 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 26.50% of the post-IPO paid-up capital of the company. From the net proceeds of the fresh equity issue, it will utilize Rs. 14.90 cr. for capex for additional plant and machinery and construction of factory shed, Rs. 26.00 cr. for working capital and the rest for general corporate purposes. 

The issue is solely lead managed by Hem Securities Ltd., and Bigshare Services Pvt. Ltd. is the registrar of the issue. HEM Group's Hem Finlease Pvt. Ltd. is the market maker for the company. 

Having issued initial equity capital at par, the company issued/converted further equity capital in the price range of Rs. 23.27 and Rs. 200 between March 2011 and November 2021. It has also issued bonus shares in the ratio of 1 for 2 in August 2023. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 6.39, Rs. 6.67, and Rs. 13.77 per share.

Post-IPO, company's current paid-up equity capital of Rs. 13.85 cr. (13848729 shares) will stand enhanced to Rs. 18.84 cr. (18840729 shares). Based on the upper IPO price band, the company is looking for a market cap of Rs. 203.48 cr.  

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has posted a total income/net profit of Rs. 109.27 cr. / Rs. 3.09 cr. (FY21), Rs. 188.47 cr. / Rs. 1.10 cr. (FY22), and Rs. 266.44 cr. / Rs. 14.00 cr. (FY23). For H1 of FY24 ended on September 30, 2023, it earns a net profit of Rs. 7.59 cr. on a total income of Rs. 147.32 cr. Thus its top and bottom lines posted growth for the reported periods. The company posted growth in its top lines for the reported periods, but its bottom line marked inconsistency and a sudden boost in it for FY23 onwards raises eyebrows and the concern over its sustainability. 

For the last three fiscals, it has reported an average EPS of Rs. 5.70, and an average RONW of 16.30%. The issue is priced at a P/BV of 2.57 based on its NAV of Rs. 42.04 as of September 30, 2023, and at a P/BV of 1.81 based on its post-IPO NAV of Rs. 59.52 per share (at the upper cap).

If we attribute annualized FY24 earnings to its post-IPO fully diluted paid-p capital, then the asking price is at a P/E of 13.40. 

For the reported periods, the company has posted PAT margins of 2.84% (FY21), 0.59% (FY22), 5.27% (FY23), 5.17% (H1-FY24), and RoCE margins of 14.44%, 8.46% 27.47%, 12.22% 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 Electrotherm (India) as their listed peers. It is trading at a P/E of 3.77 (as of January 20, 2024). However, they are not comparable on an apple-to-apple basis.

MERCHANT BANKER'S TRACK RECORD:
This is the 39th mandate from Hem Securities in the last three fiscals, out of the last 10 listings, all opened at premiums ranging from 8.57% to 125% on the date of listing.