Palm Jewels BSE SME IPO review (Avoid)

Palm Jewels Ltd. (PJL) is  engaged in the wholesale business of gold jewellery. It essentially sells gold based chains, bracelets and necklaces while  outsourcing  and manufacturing of jewellery through job workers based in Ahmedabad and Mumbai. The major raw material used for making products is gold & silver. Company procures gold & silver majorly through the bullion market and partially from the local markets in Ahmedabad. Gold bars and other necessary material are provided to the job workers who are based either in Ahmedabad and Mumbai. However, no formal agreement has been executed with either of these job workers. The finished jewellery is sold by company’s marketing and sales team directly to other jewellery stores only through B2B marketing and/ or Direct/Outbound marketing strategy.

To part finance working capital and general corpus fund needs, PJL is coming out with a maiden IPO of 2968000 equity shares of Rs. 10 each at a fixed price of Rs. 30 per share to mobilize Rs. 8.90 cr. Issue opens for subscription on 25.05.18 and will close on 01.06.18. 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 First Overseas Capital Ltd. and Karvy Computershare Pvt. Ltd. is the registrar to the issue. Issue constitutes 40.20% of the post issue paid up capital of the company. Having raised initial equity at par, it raised further equity at a price of Rs. 30 per share and then issued bonus in the ratio of 3 for 2 in March 2018. Average cost of acquisition of shares by the promoters is Rs. 5.32 and Rs. 10.76 per share. Post issue, its current paid up equity capital of Rs. 4.42 cr. will stand enhanced to Rs. 7.38 cr.

On performance front, for last four fiscals, PJL has posted turnover/net profits of Rs. 0.42 cr. / Rs. 0.002 cr. (FY14), Rs. 0.98 cr. / Rs. – (0.004) cr.. (FY15), Rs. 1.57 cr. / Rs. 0.005 cr. (FY16) and Rs. 5.52 cr. / Rs. 0.02 cr. (FY17). Surprisingly for first 11 months ended on 28.02.18 it has earned net profit of Rs. 0.44 cr. on a turnover of Rs. 19.75 cr. For last three fiscals it has posted an average EPS of Rs. 0.28 and an average RoNW of 2.63%. Issue is priced at a P/BV of 1.04 on the basis of its NAV of Rs. 28.87 as on 28.02.18 and at a P/BV of 1.58 on the basis of post issue NAV of Rs. 19.02. If we annualize latest superb earnings and attribute it on fully diluted equity post issue, then asking price is at a P/E of around 46 thus it is exorbitantly priced against industry average of 41. On the basis of its FY 17 earnings, asking price is at a P/E of around 1000. As per offer documents it is showing PC Jewellers, Renaissance Jewellery and Uday Jewellers as its listed peers that are currently trading at a P/Es of around 18, 9 and 35 respectively (as on 23.05.18)

On merchant banker’s front, this is 18th mandate from its stable in last four fiscals. Out of last 10 listings, 8 issues opened at discount to offer price, 2 with a premium ranging from 1.67% to 9.5% on the day of listing. Thus it has poor track record. Latest listing of UH Zaveri was at a whooping discount of 29%.