Safa Systems BSE SME IPO review (Avoid)

•    SSTL is engaged in distributorship of consumer durables and electronics goods.
•    It is operating in a highly competitive and fragmented segment. 
•    Its financial performance is not up to the mark.
•    The issue is highly-priced despite being offered at par. 
•    There is no harm in ignoring this IPO. 

ABOUT COMPANY:
Safa Systems & Technologies Ltd. (SSTL) is in the business of distributorship of consumer durable products like Mobile phones, Mobile phone accessories, Tablets, LED TVs, Home appliances and wearable devices of various brands like Xiaomi, OPPO, TECNO, Micromax, One Plus in Kerala. The company works in B2B (Business to Business) model. After starting as a single brand distributor it expanded its brand portfolio and increase the range. 

The Company is one of the key distributors of Electronic Products and accessories in Kerala. Presently the Company has its distributorship agreement with reputed Brands like Xiaomi, OPPO, TECNO, Micromax, One Plus for distribution of Smartphones, LED TV and accessories in the State of Kerala.

As of the date of filing this offer document, it had 26 employees on its payroll. The company operates from its registered office and a branch office recently acquired and under development. 

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its needs for working capital (Rs. 3.21 cr.), general corporate purpose (Rs. 0.30 cr.), SSTL is coming out with a maiden IPO of 4000000 equity shares of Rs. 10 each at par to mobilize Rs. 4.00 cr. The issue opens for subscription on January 28, 2022, and will close on February 01, 2022. The minimum application is to be made for 10000 shares and in multiples thereon, thereafter. Post allotment shares will be listed on BSE SME. The issue constitutes 26.53% of the post issue paid-up capital of the company. SSTL will spend around Rs. 0.49 cr. for this IPO process. This indicates the structured format of the IPO. 

The issue is solely lead managed by Finshore Management Services Ltd. and Cameo Corporate Services Pvt. Ltd. is the registrar to the issue. Nikunj Stock Brokers Ltd. is acting as a market maker for this company. 

SSTL has issued its entire equity capital at par so far. The average cost of acquisition of shares by the promoters is Rs. 10 per share. 

Post-IPO, SSTL's current paid-up equity capital of Rs. 11.08 cr. will stand enhanced to Rs. 15.08 cr. Based on IPO pricing, the company is looking for a market cap of Rs. 15.08 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, SSTL has posted turnover/net profits of Rs. 255.74 cr. / Rs. 0.36 cr. (FY19), Rs. 255.23 cr. / Rs. 0.31 cr. (FY20), and Rs. 208.66 cr. / Rs. 0.29 cr., (FY21). For the first 190 days of FY22 ended on October 07, 2021, it has earned a net profit of Rs. 0.27 cr. on a turnover of Rs. 145.19 cr.  

For the last three fiscals, SSTL has posted an average EPS of Rs. NA and an average RoNW of 3.70%. The issue is priced at a P/BV of 1 based on its NAV of Rs. 10 as of October 07, 2021, as well as post IPO basis. 

If we annualize FY22 earnings and attribute it on post IPO fully diluted equity, then the asking price is at a P/E of 29.41 making it a highly-priced issue despite being offered at par. 

COMPARISON WITH LISTED PEERS:
As per offer documents, SSTL has no listed peers to compare with. 

DIVIDEND POLICY:
The company has not declared any dividend for the reported period of offer documents. 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 21st mandate from Finshore Management in the last four fiscals (including the ongoing one). Out of the last 10 listings, 2 opened at discount and the rest with premiums ranging from 1.90% to 60.78% on the day of listings. Timescan was the exceptional case of fancy premium listing (around 61%) so far.