Petro Carbon NSE SME IPO review (May apply)

•    The company is in the business of manufacturing and marketing of CPC in the carbon industry.
•    After average financial performances for FY22 and FY23, it marked hefty bottom lines for 9M-FY23.
•    Based on annualized FY24 super earnings, the issue appears lucratively priced.
•    Based on FY23 earnings, the issue is exorbitantly priced. 
•    Only well informed investors may park moderate funds for medium term. 

PREFACE:
Perhaps this is the first mega 100% secondary SME issue (i.e. an Offer for Sale) and has many surprises in its offer documents. It has issued entire equity capital at par and also did some buy-back at par, but their internal transactions at a discounted price or as a free gift has resulted in below par acquisition cost for the residual portion for few stakeholders and at a premium for those who sold portion at a discount. You may call it an accounting tactics. What is more, it marked a bumper profit of Rs. 70.31 cr. for a nine-month period ended December 31, 2023 (i.e. in a pre-IPO period) that paved the way for such a fancy valuation for the issue. No records are available for a listed peer company India Carbon Ltd. on BSE or NSE, it is listed only on Kolkata Stock Exchange, where no trades reported since 2004. 

ABOUT COMPANY:
Petro Carbon & Chemicals Ltd. (PCCL) is a ATHA Group (the "Group") Company engaged in the business of manufacturing and marketing of Calcined Petroleum Coke ("CPC") in the carbon industry. Atha Group is a multi-product, multi-technology, multi-location business conglomerate. It is a 70-year-old diversified Indian business house headquartered in Kolkata. The Group was founded in the year 1957 in Odisha as a Mining and Minerals company. Since the last decade, the group has been focusing towards its growth strategy of business diversification, forward and backward integrations and acquisition of projects, which has significantly helped the group maintain consistency in performance and growth.

PCCL's business model is fundamentally a B2B model wherein it majorly supply end product CPC, to the renowned, aluminum manufacturing government companies, graphite electrodes and titanium dioxide manufacturers as well as other users in the metallurgical, chemical industries and other steel manufacturing companies. PCCL's plant was operational since the year 1975, wherein the detailed engineering and layout of the plant was done by Engineers India Limited. This plant was later acquired, revamped and upgraded by the group in the year of 2008. In the last five years, the group has strategically shifted its attention towards Vertical Integration, technological Innovation, Diversification, strategic partnerships which has resulted in Operational expansion, excellence, resulting in a substantial enhancement of its overall performance.

Calcined Petroleum Coke commonly known as CPC is produced from Raw Petroleum Coke (RPC) also called the Green Petroleum Coke. The result of the calcining process is converting green coke to hard, dense and almost pure carbon with low hydrogen content, good electrical conductivity and a defined structure. These properties along with low metals and ash contents make calcined petroleum coke the best material currently available for making carbon anodes for smelting of alumina to aluminium in the electrolytic smelting process.

Calcined Petroleum Coke (CPC) holds significant importance in the manufacturing of aluminium, and is also utilized in the production of steel and various other carbon-based products. It is widely used in aluminium industry, titanium dioxide industry, electrode manufacturing industry, foundry industry, glass industry metallurgical and chemical industry, steel industry and Carbon Paste etc. The process entails heating raw petroleum coke to eliminate volatile impurities, resulting in enhanced properties that make it highly suitable for various manufacturing processes. The company currently has on payroll 73 employees and also around 290 contract labourers.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden book building route IPO of 6617600 equity shares of Rs. 10 each to mobilize Rs. 113.16 cr. at the upper cap. It is a pure secondary offer i.e. an Offer for Sale (OFS). It has announced a price band of Rs. 162 - Rs. 171 per share. The issue opens for subscription on June 25, 2024, and will close on June 27, 2024. The minimum application to be made is for 800 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 26.79% of the post-IPO paid-up capital of the company. Being a pure OFS, no funds are going to the company. The main purpose of the issue is providing partial exit to some of its stakeholders and to explore listing gains. 

The issue is solely lead managed by GYR Capital Advisors Pvt. Ltd., and Bigshare Services Pvt. Ltd. is the registrar to the issue. Giriraj Stock Broking Pvt. Ltd. is the market maker for the company. 

The company has issued entire equity capital at par value so far. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 2.56, Rs. 4.96, Rs. 9.29, Rs. 11.67, and Rs. 11.98 per share. 

Post-IPO, company's current paid-up equity capital of Rs. 24.70 cr. will remain same as this is a secondary issue. Based on the upper IPO price band, the company is looking for a market cap of Rs. 422.37 cr.  

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has posted a total income/net profit of Rs. 155.29 cr. / Rs.0.12 cr. (FY21), Rs. 279.93 cr. / Rs. 5.71 cr. (FY22), and Rs. 517.61 cr. / Rs. 6.72 cr. (FY23). For 9M of FY24 ended on December 31, 2023, it earned a net profit of Rs. 70.31 cr. on a total income of Rs. 447.11 cr. Thus the bumper profits for 9M-FY24 not only raise eyebrows, but also concern over its sustainability going forward. It appears to be a window dressing in a pre-IPO period to fetch fancy valuation for the OFS.

For the last three fiscals, it has reported an average EPS of Rs. 2.04, and an average RoNW of 15.21%. The issue is priced at a P/BV of 3.97 based on its NAV of Rs. 43.13 as of December 31, 2023, as well as on post-IPO basis. Its total borrowings stood at 80.63 cr. as of December 31, 2023.

If we attribute annualized FY24 earnings to its post-IPO fully diluted paid-up capital, then the asking price is at a P/E of 4.51. While based on its FY23 earnings, the P/E stands at 62.87. Though based on FY24 annualized super earning the issue appears lucratively priced, it's a costly bet on the basis of its FY23 earnings. 

Clarifying on super earnings for 9M-FY24, management said that with their niche place in CPC market and its expanded capacity, it could put in place the cost management in getting imported CPC at a competitive price that boosted its bottom lines and also resulted in its capacity utilization to 92%. The company is supplying its products to Vedanta, Hindalco, Nalco and other aluminium manufacturing companies. Its margins have improved from December 2022 and the trends are likely to continue for coming years.

For the reported periods, the company has posted PAT margins of 0.08% (FY21), 2.06% (FY22), 1.30% (FY23), 15.78% (9M-FY24), and RoCE margins of 2.30%, 10.09%, 10.88%, 60.36% 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 Goa Carbon, and India Carbon as their listed peers. They are trading at a P/E of 8.82 and NA (as of June 21, 2024). However, they are not comparable on an apple-to-apple basis.

MERCHANT BANKER'S TRACK RECORD:
This is the 27th mandate from GYR Capital in the last four fiscals (including the ongoing one), out of the last 10 listings, all listed at a premium ranging from 36.36% to 366.67% on the date of listing.