S M Gold BSE SME IPO review (Avoid)

•    SM Gold is in manufacturing and trading of gold jewellery.
•    Financial data shows inconsistency.
•    It appears that window dressing is done in Q1 of FY19.
•    LM has poor track records.

ABOUT COMPANY:
S M Gold Ltd. (SMGL) is principally into the business of manufacturing and wholesale trading of mangalsutra jewellery. Besides mangalsutra jewellery, a minor part of business also includes other jewellery`s like Rings, Chain, Earrings, Ear Chain, Nose-rings/Nose pins, waist belts, Anklet, Zuda, Toe Ring, Pendant Set/Pendant, Bracelet and Bangles., wedding Jewellery, festive Jewellery. SMGL’s  jewellery is mostly traditional in style and is handmade by own workers. It has an in-house designing team which designs the mangalsutra and other jewellery`s in traditional, modern and indo-western style. The company also directly purchases designs from other jewellery designers. Apart from manufacturing jewellery, it also gets mangalsutra and other jewellery`s manufactured through job workers. These job workers are located in Ahmedabad, Rajkot, Kolkata and Mumbai. The raw material and design is provided by SMGL to these job workers. The job workers take approximately 10-12 days to complete the finished jewellery. However, no formal agreement has been executed with either of these job workers. Besides, manufacturing and job work, company also purchases readymade mangalsutra and other jewellery`s from other independent jewellery wholesalers located in Mumbai.

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its working capital and general corpus fund needs, SMGL is coming out with a maiden IPO of 2500000 equity shares of Rs. 10 each at a fixed price of Rs. 30 per share to mobilize Rs. 7.50 cr. Issue opens for subscription on 03.10.18 and will close on 10.10.18. Minimum application is to be made for 4000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. Issue constitutes 37.36% of the post issue paid up capital of the company. Issue is solely lead managed by First Overseas Capital Ltd. and Karvy Computershare Pvt. Ltd. is the registrar to the issue. Having issued initial equity at par, it raised further equity at a price of Rs. 30 per share and has also issued bonus shares in the ratio of 3 for 2 in February 2018. Average cost of acquisition of shares by the promoters is Rs. 11.63 and Rs. 11.97 per share. Post issue, SMGL’s current paid up equity capital of Rs. 4.19 cr. will stand enhanced to Rs. 6.69 cr.

FINANCIAL PERFORMANCE:
On financial performance front, for last four fiscals, SMGL has posted turnover/net profits of Rs. 19.55 cr. / Rs. 0.21 cr. (FY15), Rs. 23.82 cr. / Rs. 0.17 cr. (FY16), Rs. 22.79 cr. / Rs. 0.18 cr. (FY17) and Rs. 13.54 cr. / Rs. 0.18 cr. (FY18). Thus while it suffered a setback for FY18, it maintained bottom line with zero finance cost. However, its financial track record shows inconsistency. For first quarter of FY19 it has earned net profit of Rs. 0.22 cr. on a turnover of Rs. 4.90 cr. that appears to be window dressing ahead of IPO. Surprisingly SMGL has not shown last three year’s average EPS and average RoNW even when it has shown financial data for the said periods. In fact it has just mentioned EPS for FY18 and Q1 of FY19 just to support its pricing of the issue. Issue is priced at a P/BV of 2.33 based on its NAV of Rs. 12.89 as on 30.06.18 and at a P/BV of 1.55 based on post issue NAV of Rs. 19.30. If we consider FY19 Q1 cooked up financial data and after annualizing it if we attribute it on fully diluted post issue equity, then asking price is at a P/E of around 23 thus even with such rosy earnings, issue is aggressively priced. SMGLK’s trade receivables as on 31.03.18 and 30.06.18 (Q1 of FY19) were Rs. 4.53 cr. and Rs. 4.23 cr. Employees benefits has been below Rs. 10 lakh per annum indicating low headcounts with the company.

COMPARE WITH LISTED PEERS:
As per offer documents, it has shown Lypsa Gems and Narbada Gems as its listed peers (which are not strictly comparable). They are currently trading at a P/Es of around 171 and 18 (as on 28.09.18).Here again, surprisingly LM has not considered U H Zaveri, Palm Jewels as listed peers despite having managed IPOs for these companies. Both these are trading at a P/E s of around 12 and (NA) (as on 28.09.18.

MERCHANT BANKER’S TRACK RECORD:
On merchant banker’s front, this is the 20th mandate from its stable in last five years. Out of last 10 listings 7 issues opened at a discount and the rest with a premium ranging from 1.67% to 25% on the day of listing. This LM brought most controversial IPO of U H Zaveri and few other IPOs in gold/jewellery segment.