R O Jewels BSE SME IPO review (Avoid)

•    ROJL is engaged in the business of wholesale of gold and silver chains.
•    It operates in Ahmedabad with just one store and a total of 9 employees.
•    Perhaps it has window dressed IPO year FY20 H1 financial performance.
•    The company operates in a low margin high competition segment.
•    Its main bankers are trouble ridden Yes Bank Ltd.
•    Lead Manager has a poor track record.


ABOUT COMPANY:
R O Jewels Ltd. (ROJL) is engaged in the wholesale business of gold and silver chains with its operation limited to Ahmedabad. It procures readymade chains and other jewellery from the manufacturers or independent jewellery wholesales located in Ahmedabad and Mumbai. Besides selling third party products through own showroom, ROJL also sales it in Gujarat through B2B marketing. It operates from premises on 11 months leave and licence.

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its working capital (Rs. 4.60 cr.) and general corpus fund needs (Rs. 0.06 cr.),  ROJL is coming out with a maiden IPO of 1365000 equity shares of Rs. 10 each at a fixed price of Rs. 36 per share to mobilize Rs.4.91 cr. The issue opens for subscription on 12.03.20 and will close on 17.03.20. Minimum application is to be made for 3000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. The issue constitutes 48.20% of the post issue paid-up capital of the company. This issue is solely lead managed by First Overseas Capital Ltd. and KFin Technologies Pvt. Ltd. is the registrar to the issue. Beeline Broking Ltd. is acting as a market maker for this issue. ROJL is spending Rs. 0.25 cr. for the entire IPO process. Bankers to the company is trouble ridden Yes Bank Ltd.

Having issued/converted initial equity at par, ROJL converted further equity for Rs. 40 per share between January 2019 and May 2019. It has also issued bonus shares in the ratio of 1 for 6 in August 2019. The average cost of acquisition of shares by the promoters is Rs. 8.57, Rs. 33.63 and Rs. 34.20 per share. ROJL's current paid-up equity capital of Rs. 1.47 cr. will stand enhanced to Rs. 2.83 cr. post this issue.  Post this issue, ROJL is looking for a market cap of Rs. 10.20 cr.

FINANCIAL PERFORMANCE:
For the last three fiscals, as per restated financial data, ROJL has posted turnover/net profits of Rs. 5.74 cr. / Rs. 0.06 cr. (FY17), Rs. 9.76 cr. / Rs. 0.07 cr. (FY18) and Rs. 4.24 cr., / Rs. 0.01 cr. (FY19). Thus it has shown inconstancy in the top and bottom lines. For the first half of FY20, it has earned a net profit of Rs. 0.15 cr. on a turnover of Rs. 10.47 cr. There appears to be window dressing in the IPO year. However, according to offer documents, an amalgamation of Ravi Ornaments with the newly formed limited company i.e. ROJL has transpired boosts in the top and bottom lines. FY17 and FY18 financial data related to Ravi Ornaments only and thereafter it is for ROJL.

ROJL has posted an EPS of Rs. 2.51 for FY19 and Rs. 1.03 (not annualized) for H1FY20. It has posted RoNW of 1.38% and 2.91% for the said periods respectively. The issue is priced at a P/BV of 1.02 based on its NAV of Rs. 35.21 as on 30.09.19 and at a P/BV of 1.03 based on post-issue NAV of Rs. 35.06. If we annualize latest earnings and attribute it on fully diluted equity post issue, then asking price is at a P/E of around 34 against industry composite of 40 P/E, making it a fully priced issue based on super earnings for H1 FY20. Sustainability of such performance appears remote as the company is in a highly competitive segment with organized/unorganized players around.  

COMPARISION WITH LISTED PEERS:
As per offer documents, ROJL has shown Narbada Gems and Vaibhav Global as its listed peers. They are currently trading at a P/E of around 8.59 and 105.89 (as on 06.03.20).  However, they are not at all comparable on an apple to apple basis.

MERCHANT BANKER'S TRACK RECORD:
This is the 14th mandate from its stable in the last four fiscals (including the ongoing one). Out of last 10 listings, 5 opened at discount, 1 at par and the rest with a premium ranging from 1.67% to 25% on the day of listing. Thus it has poor track records. Some of the issues brought by this LM are U H Zaveri, Gautam Gems, Kenvi Jewels etc.