Prospect Commodities BSE SME IPO review (Avoid)

•    PCL is in the business of processing and trading of Raw Cashew Nuts.
•    It has posted just 8 months working as a corporate entity.
•    There appears to be some window dressing in results as a corporate entity compared to its performance as a partnership firm.
•    Based on its latest working, the issue is priced aggressively. 
•    There is no harm in skipping this "High-risk/Low" return bet. 

ABOUT COMPANY:
Prospect Commodities Ltd. (PCL) was incorporated as a partnership firm titled as Fortune Exports was renamed as Prospect Commodities Pvt. Ltd. and then finally resulted in the current status with the conversion of the firm into a corporate public limited entity w.e.f. April 01, 2022.  It is in the business of trading of cashew in the B2B Market. The Company is selling the Cashews to wholesalers in the state of Gujarat only. Currently, the Company is not able to cater for the demand of Gujarat State, hence it has not ventured to supply or develop a market outside of Gujarat. 

The cashews are packed in a tin of 10 KG. The Company had instead of importing the RCN (Raw Cashew Nut) from other countries, which require importing in larger quantity and blocking the Working Capital Fund, started buying the RCN from Gujarat who are importing from other countries and also from Kolam, Tuticorin and Mangalore.

The firm which was in the trading of agro products ventured into the processing of Raw Cashew Nuts (RVN) with a capacity of 150 mtpa and has now a total capacity of 1200 mtpa. As of November 30, 2022, it had 8 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden IPO of 1226000 equity shares of Rs. 10 each at a fixed price of Rs. 61 per share to mobilize Rs.7.48 cr. The issue opens for subscription on March 08, 2023, and will close on March 10, 2023. The minimum application to be made is for 2000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. The issue constitutes 29.97% of the post-IPO paid-up capital of the company. PCL is spending Rs. 0.98 cr. for this IPO process. This indicates funding arrangements planned by the company/merchant bankers. From the net proceeds, it will utilize Rs. 0.50 cr. for repayment of unsecured loans, Rs. 4.40 cr. for working capital and Rs. 1.60 cr. for general corporate purposes. 

Interactive Financial Services Ltd. is the sole lead manager and Bigshare Services Pvt. Ltd. is the registrar of the issue. Beeline Broking Ltd. is the market maker for the company. 

The company has issued/converted the entire equity capital at par value. The average cost of acquisition of shares by the promoters is Rs. 10 per share. 

Post-IPO, PCL's current paid-up equity capital of Rs. 2.86 cr. will stand enhanced to Rs. 4.09 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 24.95 cr. The small equity base post-IPO also indicates a longer gestation period for migration to the mainboard.

FINANCIAL PERFORMANCE:
On the financial performance front, for the current fiscal, PCL has reported a net profit of Rs. 0.53 cr. on a turnover of Rs. 8.40 cr. for the first eight months period of FY23 ended on November 30, 2022, Thus boost in the bottom line for this broker period raise eyebrows and concern over the sustainability as the segment is highly competitive and fragmented. For the said reported period, it posted an EPS of Rs. 16.78 and a RoNW of 17.99% (not annualized). 

As a partnership firm, for the last three fiscals, it reported a turnover/profit before tax of Rs. 4.78 cr. / Rs. 0.05 cr. (FAY20), Rs.9.88 cr. / Rs. 0.13 cr. (FY21) and Rs. 10.93 cr. / Rs. 0.13 cr. (FY22). 

The issue is priced at a P/BV of 5.00 based on its NAV of Rs. 12.19 as of November 30, 2022, and at a P/BV of 2.29 based on its post-IPO NAV of Rs.26.58 per share. 

If we annualize FY23 earnings and attribute it to a post-IPO fully diluted paid-up equity capital base, then the asking price is at a P/E of 31.44.  Thus even based on its super earnings, the issue appears to have been aggressively priced. 

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 shown Empyren Cashews as their listed peer. It is currently trading at a P/E of 151.16 (as of March 06, 2023). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
This is the 7th mandate from Interactive Financial in the last two fiscals (including the ongoing one). Out of the last 6 listings, 2 opened at a discount and the rest with premiums ranging from 0.08% to 5.19% on the listing day. Thus it has a poor track record.