Sahaj Fashions NSE SME IPO review (Avoid)

•    SFL is the manufacturing of high-standard fabrics, a highly competitive and fragmented segment.
•    It marked inconsistency in its financial performance for the reported periods. 
•    The sudden jump in the bottom line for pre-IPO year raises eyebrows and concern over sustainability. 
•    Based on its financial data so far, the issue is greedily priced. 
•    There is no harm in skipping this "High Risk/Low Return" bet. 

ABOUT COMPANY:
Sahaj Fashions Ltd. (SFL) is engaged in the manufacturing of high-standard fabric which is used for various purposes such as garments, home furnishings, industrial applications, etc. It has expertise in manufacturing of primarily cotton suiting fabric and cotton shirting fabric apart from polyester-based and cotton-polyester blended fabrics. It also manufactures cotton yarn-dyed fabrics that have demand throughout the year.  At present its sales have penetrated in home state of Rajasthan as well as some other states like Gujarat, Maharashtra and Delhi.

In the year 2014, SFL exposed products to international markets through Merchant Exporters. In 2015, the company decided to enter into expansion with backward integration which is a pre-process of fabric weaving. The experience and trade relations developed by promoters and management have been one of the key instrumental factors in the growth of the company. It aims to grow its brand as a distinguished name in the industry. As of May 31, 2023, it had 114 employees on its payroll and about 10-20 contract labourers as required. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden combo IPO of 4476000 fresh equity shares (worth Rs. 13.43 cr.) and an Offer for Sale (OFS) of 176000 shares (worth Rs. 0.53 cr.), thus a total number of 4652000 equity shares. The issue is priced at Rs. 30 per share and it mulls mobilizing Rs. 13.96 cr. The issue is opening for subscription on August 25, 2023, and will close on August 29, 2023. The minimum application to be made is for 4000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 35.33% of the post-IPO paid-up equity capital of the company. SFL is spending Rs. 0.60 cr. for this IPO process and out of the net proceeds from the fresh issue, it will utilize Rs. 6.68 cr. for working capital, Rs. 4.20 cr. for repayment/prepayment of certain secured borrowings, Rs. 1.95 cr. for general corporate purposes.  

Khambatta Securities Ltd. is the sole lead manager and Bigshare Services Pvt. Ltd. is the registrar of the issue. NNM Securities Ltd. is the market maker for the company. 

Having issued initial equity shares at par value, the company issued further equity shares in the price range of Rs. 25 to Rs. 750 per share between September 2011 and March 2023. It has also issued bonus shares in the ratio of 47 for 1 in August 2018. The average cost of acquisition of shares by the promoters is Rs. NIL, Rs. 15.08, Rs. 15.09, Rs. 15.11, Rs. 15.16, and Rs. 15.45 per share. 

Post-IPO, SFL's current paid-up equity capital of Rs. 8.69 cr. will stand enhanced to Rs. 13.17 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 39.50 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, SFL has posted a turnover/net profit of Rs. 99.34 cr. / Rs. 0.27 cr. (FY20), Rs. 74.76 cr. / Rs. 0.32 cr. (FY21), and Rs. 86.98 cr. / Rs. 0.43 cr. (FY22). For 11M of FY23, it earned a net profit of Rs. 2.89 cr. on a turnover of Rs. 90.98 cr. Thus, it marked inconsistency in its top and bottom lines for the reported periods. The sudden boost in its bottom lines in a pre-IPO year by nearly 7 times raises eyebrows as well as concern over sustainability. 

For the last three fiscals, SFL has reported an average EPS of Rs. 0.50 and an average RoNW of 2.58%. The issue is priced at a P/BV of 1.29 based on its NAV of Rs. 23.26 as of February 28, 2023, and at a P/BV of 1.24 based on its post-IPO NAV of Rs. 24.26 per share. 

If we annualize its super earnings for FY23 and attribute it to post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 13.70, while based on its FY22 earnings, P/E stands at 93.75. Thus the issue appears greedily priced.  

DIVIDEND POLICY:
The company has not declared any dividends for any financial year so far. It will adopt a prudent dividend policy based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per offer documents, surprisingly SFL has shown Arvind Ltd., RSWM Ltd., and Vardhman Textiles as their listed peers. They are trading at a P/E of 11.85, 24.22, and 17.66 (August 22, 2023). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
This is the 6th mandate from Khambatta Securities in the last two fiscals (including the ongoing one). Out of the last 5 listings, all are listed at premiums ranging from 2.02% to 89.11% on the date of listing.