Rachana Infra NSE SME IPO review (Avoid)

•    RIL is engaged in infrastructural development related business. 
•    It has posted inconsistency in its top and bottom lines. 
•    The issue is priced exorbitantly based on its latest financial performance. 
•    There is no harm in skipping this pricy bet. 

ABOUT COMPANY:
Rachana Infrastructure Ltd. (RIL) is one of the mid-size private sector companies engaged in the business of Construction of Road projects on a Bill of Quantities (BOQ) and EPC basis. In the very initial periods, it got the contracts from the Government (Zilla Panchayat) on a very small scale. In addition, RIL got subcontracts from the infrastructure Companies from Gujarat, Maharashtra and many other states. 

It has successfully completed many projects in various departments of the Government of India. Some of its satisfied clients are the Public Works Department of Madhya Pradesh, Road and Building Department of Gujarat State, Madhya Pradesh Road Development Corporation, Power Grid Corporation of India, Gujarat Minerals Development Corporation, Road Construction Department of Jharkhand, ONGC Petro-Additions Limited, Ahmedabad Municipal Corporation, and Ahmedabad Urban Development Corporation etc.

RIL's order book as of December 31, 2021, was Rs. 238.65 cr. The orders are subject to cancellation and modification provisions contained in the various contracts and other relevant documentation.

As of February 28, 2022, the company had a total strength of 160 permanent employees (including workers) in various departments.

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its funding needs for repayment of secured loans (Rs. 7.50 cr.), working capital (Rs. 21.50 cr.) and general corporate purposes (Rs. 9.39 cr.)  RIL is coming out with a combo maiden IPO worth Rs. 77.98 cr. comprising of a fresh equity issue for Rs. 38.99 cr. as well as an offer for sale (OFS) of Rs. 38.99 cr. The company is issuing an overall 5650000 equity share of Rs. 10 each at a fixed price of Rs. 138 per share. The issue opens for subscription on May 20, 2022, and will close on May 25, 2022. Minimum application is to be made for 1000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 30.37% of the post-IPO paid-up equity capital of the company. RIL will be spending Rs. 0.60 cr. for the IPO process. 

The issue is solely lead managed by Interactive Financial Services Ltd. and Bigshare Services Pvt. Ltd. is the registrar to the issue. NNM Securities Pvt. Ltd. is the market maker for this IPO.

Having issued initial equity shares at par, RIL issued further equity shares in the price range of Rs. 12.50 to Rs. 52.50 between November 2005 and March 2019. The company has also issued bonus shares in the ratio of 2 for 1 in February 2022. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 2.94, Rs. 9.92 / Rs. NIL, Rs. 2.94, 3.33, Rs. 3.51, Rs. 4.47, Rs. 5.28, Rs. 6.67, Rs. 7.77, Rs. 11.91, Rs. 21.33 per share. 

Post-IPO, RIL's current paid-up equity capital of Rs. 15.78 cr. will stand enhanced to Rs. 18.61 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 256.75 cr. 

FINANCIAL PERFORMANCE: 
On the financial performance front, for the last three fiscals, RIL has posted turnover/net profits of Rs. 113.93 cr. / Rs. 4.66 cr. (FY19), Rs. 158.41 cr. / Rs. 5.97 cr. (FY20) and Rs. 107.06 cr. / Rs. 4.55 cr. (FY21). For the first nine months of FY22 ended on December 31, 2021, it has earned a net profit of Rs. 1.40 cr. on a turnover of Rs. 41.71 cr. 

For the last three fiscals, it has posted an average EPS of Rs. 3.20 and an average RoNW of 14.31%. The issue is priced at a P/BV of 5.35 based on its NAV of Rs. 25.80 as of December 31, 2021, and at a P/BV of 3.23 based on its post-IPO NAV of Rs. 42.76.   

If we annualize FY22 earnings and attribute it to post IPO fully diluted equity capital, then the asking price is at a P/E of 138, making it an exorbitantly priced issue. 

COMPARISON WITH LISTED PEERS:
As per offer documents, RIL has shown HEC Infra and Akash Infra as its listed peers. They are currently trading at a P/E of 67.13 and 42.94 (as of May 17, 2022). However, they are not truly comparable on an apple-to-apple basis. 

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

MERCHANT BANKER'S TRACK RECORDS:
This is the 3rd mandate from Interactive Financial in the last two fiscals (including the ongoing one). Out of the last two listings, one opened at a discount and one at a premium of 0.08% on the day of listings.