Pattech Fitwell NSE SME IPO review (Avoid)

•    The company emerged from the conversion of a partnership firm in August 2022.
•    PFTCL is in the business of manufacturing forged and machine components.
•    It is operating in a highly competitive and fragmented segment. 
•    Based on its super performance for the last 20 months the issue is exorbitantly priced.
•    There is no harm in skipping this pricey offer.
 
ABOUT COMPANY:
Pattech Fitwell Tube Components Ltd. (PFTCL) was converted into a public limited company from a partnership firm in August 2022.  It is a manufacturer of forging products for the non-automotive sector. It has a total installed capacity of 14104.13 MTPA for manufacturing forged flanges, complex and specialized machined components and welded assemblies in the area of open die forgings. The Company converts semi-finished / raw products to finished products by carrying value-added processes such as forming, bending, drilling, cutting, inspection, polishing, painting, blasting, welding, punching, marking, testing and packaging. It manufactures these products from carbon steel, alloy steel and stainless steel pipes, coils, plates, structures and forgings conforming to international standards.

PFYCL has been in the business of manufacturing a wide range of forged and machined components that are used in pipes and tube fittings like Elbows, Flanges, Tees, Reducers, Caps, pipe spools and other fabrication works being used in various industries like fertilizers, petrochemical, power, chemical & pharmaceutical, food processing, oil & gas, desalination & water treatment, shipbuilding, defense, fabrication of process equipment, instrumentation etc.  As of December 31, 2022, it had 9 employees including skilled and unskilled on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden IPO of 2400000 equity shares of Rs. 10 each at a fixed price of Rs. 50 per share to mobilize Rs. 12.00 cr. The issue opens for subscription on April 05, 2023, and will close on April 12, 2023. The minimum application to be made is for 3000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME. The issue constitutes 30.94% of the post-IPO paid-up capital of the company. PFTCL is spending Rs. 0.71 cr. for this IPO process and from the net proceeds it will utilize Rs. 8.65 cr. for working capital, and Rs. 2.64 cr. for general corporate purposes. 

Fedex Securities Pvt.  Ltd. is the lead manager and Bigshare Services Pvt. Ltd. is the registrar of the issue. Pure Broking Pvt. Ltd. is the market maker for the company. 

The company has issued/converted entire initial equity shares at par. The average cost of acquisition of shares by the promoters is Rs10.00 per share. 

Post-IPO, PFTCL's current paid-up equity capital of Rs. 5.36 cr. will stand enhanced to Rs. 7.76 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 38.79 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, PFTCL has posted a turnover/net profit - (loss) of Rs. 20.39 cr. / Rs. 0.08 cr. (FY20), Rs. 18.45 cr. / Rs. - (0.01) cr. (FY21), and Rs. 22.63 cr. / Rs. 1.44 cr. (FY22). For two periods of FY23 (from 01.04.22 to 21.08.22 and from 22.08.22 to 30.11.22), it earned a net profit of Rs. 0.55 cr. on a turnover of Rs. 21.06 cr. The sudden boost in its bottom lines for the last 20 months working raise eyebrows and concern over the sustainability of the same. 

For the last three fiscals, PFTCL has reported an average EPS of Rs. NA and an average RoNW of NA. The issue is priced at a P/BV of NA based on its NAV of Rs. NA as of November 30, 2022, and at a P/BV of 2.24 based on its post-IPO NAV of Rs. 22.29 per share. Its RoE and RoCE as of November 30, 2022, have declined to 3.55% and 2.84% from 25.66% and 11.00% as of March 2022 respectively. 

If we annualize FY23 earnings and attribute them to post-IPO fully paid-up equity capital, then the asking price is at a P/E of 46.73. Thus the issue is priced exorbitantly.

DIVIDEND POLICY:
The company has not declared any dividends since incorporation. It will adopt a prudent dividend policy post-listing, based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per the offer document, the company has no listed peers to compare with. 

MERCHANT BANKER'S TRACK RECORD:
This is the 15th mandate from Fedex Securities in the last four fiscals (including the ongoing one). Out of the last 10 listings, 1 opened at discount, 2 at par, and the rest listed at premiums ranging from 0.08% to 108.93% on the listing date.