Pritika Engg NSE SME IPO review (May apply)

•    PECL is engaged in the automotive sector catering to the tractor industry.
•    After the average financial performance, it marked super earnings for FY22.
•    Based on its FY23 earnings, the issue appears lucratively priced. 
•    The sustainability of such margins going forward raises concern.
•    Well-informed, risk seeker cash surplus investors may park funds for the long term.

PREFACE:
Pritika Auto Industries Ltd., (PAIL) a company that was originally listed only on Kolkata Stock Exchange got itself listed on BSE in October 2015 and subsequently on NSE in August 2021. Pritika Auto Industries Limited, having CIN L45208PB1980PLC046738 is the sole promoter of PECL. The company was originally incorporated as a public limited Company on April 11, 1980, under the name and style of Hariganga Machineries and Engineering Services Limited with the Registrar of Companies, Maharashtra. Subsequently, the name of the Company was changed to Shivkrupa Machineries and Engineering Services Limited on August 05, 2015. On March 16, 2017, the name of the Company was changed from Shivkrupa Machineries and Engineering Services Limited to Pritika Auto Industries Limited. Thus it changed its name often. On the financial front too except for FY22, it posted an average performance that kept its counters hovering in a trading range. After paying dividends for FY18 and FY19, PAIL has skipped dividends thereafter. It opted for a stock split from Rs. 10 to Rs. 2 in April 2021. PAIL is the promoter of PECL. 

ABOUT COMPANY:
Pritika Engineering Components Ltd. (PECL) caters to the tractor industry in the automotive sector with major dependency on Original Equipment Manufacturers. It supplies products directly to OEM and through its promoter company Pritika Auto Industries Limited and group company Pritika Industries Limited. PECL is engaged in the business of manufacturing precision machined components primarily for the automotive industry, especially for tractors, trucks, and other commercial vehicles, etc. The company manufactures various Tractors & Automobile components like End Covers, Cover Sealed Brakes, Differential Cases, Cover Hydraulic Lift, Cover Transcase, Front Wheel hubs, Fly Wheel Housing, Rear Axle Casings, Hydraulic Lift Covers, Brake Housing & Front Engine Supports, etc.

It has set a mission to Produce 35,000 MT of Machined Castings by the Year 2025. In FY22, it manufactured 6619 MT with an installed capacity of 12000 MT. As of September 30, 2022, it has 415 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its needs for investment in a new unit set up by its subsidiary Meeta Castings (Rs. 7.00 cr.), and general corporate purposes (Rs. 0.57 cr.), PECL is coming out with a maiden IPO of 3248000 equity shares of Rs. 10 each at a fixed price of Rs. 29 per share to mobilize Rs. 9.42 cr. Minimum application is to be made for 4000 shares and in multiples thereon, thereafter. The issue opens for subscription on November 25, 2022, and will close on November 30, 2022. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 29.85% of the post-issue paid-up capital of the company. PECL is spending Rs. 1.85 cr. for this IPO process. This indicates fully structured arrangements for this IPO. 

The sole lead manager for this issue is GYR Capital Advisors Pvt. Ltd. (erstwhile known as Alpha Numero Services Pvt. Ltd.), and Link Intime India Pvt. Ltd. is the registrar to the issue. SMC Global Securities Ltd. is the market maker for this company.

Having issued/converted initial equity at par value, it raised further equity at a price of Rs. 26 per share in September 2020, and February 2021. The average cost of acquisition of shares by the promoters is Rs. 15.52 per share. 
 
Post-IPO, PECL's current paid-up equity capital of Rs. 7.63 cr. will stand enhanced to Rs. 10.88 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 31.56 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, PECL has (on a standalone basis) posted turnover/net profits of Rs. 21.72 cr. / Rs. 0.14 cr. (FY20), Rs. 32.44 cr. / Rs. 0.38 cr. (FY21), and Rs. 57.40 cr. / Rs. 5.46 cr. (FY22). Thus sudden boost in the top line with many fold rises in the bottom line raises eyebrows. For H1 of FY23, it earned a net profit of Rs. 1.86 cr. on a turnover of Rs. 43.40 cr. Thus super performance for the FY22 appears as a window dressing. On a consolidated basis, PECL has earned a net profit of Rs. 1.80 cr. on a turnover of Rs. 43.35 cr. for H1 of FY23. 

For the last three fiscals, on a standalone basis, PECL has reported an average EPS of Rs. 3.82 and an average RoNW of 17.96%. The issue is priced at a P/BV of 1.21 based on its NAV of Rs. 24.00 as of September 30, 2022, and at a P/BV of 1.14 based on its post-IPO NAV of Rs. 25.50 per share. If we annualize FY23 earnings and attribute it to the post-IPO fully diluted equity capital, then the asking price is at a P/E of 8.76. Thus the issue appears lucratively priced but the sustainability of margins is a major concern. 

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, PECL has shown Nelcast and Bhagwati Auto as their listed peers. They are currently trading at a P/E of 25.71 and 30.05 (as of November 23, 2022). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
This is the 9th mandate from GYR Capital in the last two fiscals (including the ongoing one). Out of the last 8 listings, all opened with premiums ranging from 0.75% to 90.91% on the day of listing.