Rikhav Securities BSE SME IPO review (May apply)

•    RSL is engaged in the business of equity broking, investing and trading activities as SEBI registered stock broker.
•    It posted steady growth in its top and bottom lines for the reported periods.
•    The sudden boost in bottom lines from FY23 onwards raise eyebrows.
•    Based on its recent financial performance, the issue appears fully priced. 
•    Well-informed investors may park moderate funds for long term. 

ABOUT COMPANY:
Rikhav Securities Ltd. (RSL) is engaged in the business of equity broking, investing, and trading activities. It is registered with SEBI as a stock broker and hold memberships with BSE Limited (BSE), the National Stock Exchange of India (NSE), and the Multi Commodity Exchange (MCX). Its services encompass a comprehensive range of financial activities such as, equity broking, it offers cash delivery, intra-day trading, futures, and options. It is actively involved in trading across various derivative and commodity segments. Additionally, as a Self-Clearing Member of both the Indian Clearing Corporation Limited (ICCL) and NSE Clearing Limited (NCL), it ensures the smooth settlement of trades. RSL also assists clients in participating in Initial Public Offerings (IPOs) and provide depository services, including the opening and maintenance of demat accounts. 

As a mutual fund advisor and distributor, it guides clients through mutual fund investments, ensuring they navigate their options effectively. The company also engaged in the business of Market Making by way of supporting companies that have recently listed their securities on stock exchanges. By facilitating the buying and selling of these securities post-initial public offerings (IPOs), it enhances liquidity and market efficiency. RSL is registered as a Market Maker with the BSE Limited (BSE) in 2012 and with the National Stock Exchange (NSE) in 2016, accumulating over a decade of experience in this field. As on the date of this Red Herring Prospectus, it has executed market-making mandates for 66 companies listed on SME platforms. Its market-making activities involve providing two-way quotes during trading hours to ensure liquidity in the SME segment. Its revenue model includes fixed fees from corporates, which consist of one-time and annual fees, as well as additional earnings from spreads and other trading activities in secondary market transactions. 

Its commitment in market making continues to contribute to the dynamic and efficient functioning of the securities market. It is also engaged in making proprietary investments in various tradable securities. It invests in both securities and derivatives, currency with sufficient liquidity. The investment strategies are mostly to earn arbitrage gain done based on analysis and investment rationale. Its broking and other services are offered through online and digital platforms, and its network of 24 Authorized Persons (the “Authorized Persons”) for the NSE equity segments, 23 Authorized Persons for the NSE Derivative segment, 8 Authorized Persons for the NSE Currency segment, 24 Authorized Persons and for the BSE Equity segment to acquire new clients and support existing clients with their business-related needs. Its client outreach spans several pin codes across India. As part of its financial product distribution business, RSL serves a diverse range of clients by facilitating investments in financial instruments and providing a variety of wealth solutions. Trading income has the lion share in its total income. As of September 30, 2024, it had 394 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden book building route combo IPO of 10328000 equity shares to mobilize Rs. 88.82 cr. (at the upper cap). The IPO consists of 8328000 fresh equity shares worth Rs. 71.62 cr. at the upper cap and an Offer for Sale (OFS) of 2000000 shares worth Rs. 17.20 cr. at the upper cap. The company has announced the price band of Rs. 82 – Rs. 86 per share of Rs. 5 each. The issue opens for subscription on January 15, 2025, and will close on January 17, 2025. The minimum application to be made is for 1600 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. The issue constitutes 26.97% of the post-IPO paid up equity capital of the company. From the net proceeds of the fresh equity issue, it will utilize Rs. 46.00 cr. for incremental working capital, Rs. 4.13 cr.  for capex on purchase of IT software, computers/laptops, and the rest for general corporate purposes. 

The issue is solely lead managed by Smart Horizon Capital Advisors Pvt. Ltd. (erstwhile Shreni Capital Advisors Pvt. Ltd.), and Link Intime India Pvt. Ltd. Is the registrar to the issue, Shreni Shares Ltd. is the market maker for the company, as well as a syndicate member. 

Having issued initial equity shares at par value, the company issued further equity shares in the price range of Rs. 15 – Rs. 75 per share (based on Rs. 5 FV) between July 2006 and March 2021. It has also issued bonus shares in the ration of 2 for 1 in April 2022. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 3.30, Rs. 3.81, Rs. 5.00, Rs. 6.43, Rs. 7.66, Rs. 7.74, Rs. 13.57, Rs. 18.20, and Rs. 24.80 per share. 

Post-IPO, company’s current paid-up equity capital of Rs. 14.98 cr. will stand enhanced to Rs. 19.15 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 329.31 cr.

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has (on a consolidated basis) posted a total income/net profit of Rs. 42.98 cr. / Rs. 17.63 cr. (FY22), Rs. 54.52 cr. / Rs. 19.57 cr. (FY23), and Rs. 111.34 cr. / Rs. 42.65 cr. (FY24). For H1 of FY25 ended on September 30, 2024, it earned a net profit of Rs. 50.37 cr. on a total income of Rs. 96.16 cr. 

For the last three fiscals, the company has posted an average EPS of 10.22 and an average RoNW of 26.02%. The issue is priced at a P/BV of 1.37 based on its NAV of Rs. 62.89 as of September 30, 2024, and at a P/BV of 1.31 based on its posts-IPO NAV of Rs. 65.64 per share (at the upper cap). 

If we attribute FY25 annualized super earnings to its post-IPO fully diluted paid-up capital, then the asking price is at a P/E of 3.27. Based on FY24 earnings, the issue is at a P/E of 7.72. The issue relatively appears fully priced based on its recent financial performance. Super earnings in pre-IPO period raise eyebrows.

For the reported periods, the company has posted PAT margins of 49.65% (FY22), 39.56% (FY23), 40.94% (FY24), 54.25% (H1-FY25), and RoCE margins of 28.07%, 26.68%, 29.48%, 30.66%, 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. 

COMPARISION WITH LISTED PEERS:
As per the offer document, the company has shown Alacrity Securities, Angel One, Share India, Pune E-stock, as their listed peers. They are trading at a P/E of 53.5, 17.4, 13.5, and 14.9 (as of January 10, 2025). However, they are not truly comparable on an apple-to-apple basis.  

MERCHANT BANKER’S TRACK RECORD:
This is the 1st mandate from Smart Horizon in the ongoing fiscal. Hence, it has no track records for the past mandates.