Sahasra Electronics NSE SME IPO review (May apply)

•    The company is providing solutions for electronics system design and manufacturing services.
•    The proprietorship company got converted in to public company last year.
•    FY24 results as a corporate entity raised eyebrows and concern over the sustainability of profit margins reported.
•    Based on FY24 super earnings, the issue appears fully priced. 
•    Well-informed investors may park moderate funds for medium term. 

ABOUT COMPANY:
Sahasra Electronics Solutions Ltd. (SESL) is an EN 9100:2018 (equivalent to AS 9100D and JISQ 9100:2016, including ISO 9001:2015) certified company, which is engaged in the business of providing solutions towards electronics system design and manufacturing ("ESDM") services at its manufacturing plant located Gautam Buddha Nagar, Noida, Uttar Pradesh - 201305, which is equipped with four high speed SMT lines having a total capacity of around 1800000 units. It provides product and solutions right from printed circuit board ("PCB") assembly, Box Build, LED lighting. Memory, IT accessories, computer and IT hardware. It has made export of over 80% of products and solutions during the FY 2024 to certain global manufacturers located in countries like United States of America, Rwanda, Tunisia, United Kingdom, Germany, Canada, Austria & Belgium.

Its current product portfolio may be categorized as: 1. Printed circuit board assemblies ("PCBA"): PCBAs are used in products manufactured in the automotive, medical, industrial, IT and consumer products industries, and shall include box-build products such as laptop and tablets; 2. LED Lighting solutions, which include LED Chip - the source of the lightning, power supply or the driver, printed circuit board for LED's, housing or the frame. 3. Memory product which includes -DRAM modules, Solid State Drives (SSD), USB flash storage device etc. 4. IT hardware which includes -Motherboard, laptop, Computer, Tablets, and other accessories.

SESL's manufacturing facilities comprises of four SMT lines equipped with machines including RMTS high speed clip machine, surface mount technology ("SMT") machines, lead free wave soldering machine, PCBA router, high speed compact modular mounter, reflow oven and surface cleaning machines. Additionally, it has also installed quality inspection machines such as high speed PWB inspection, PWB Visual inspection and X-Ray inspection machines to ensure the high standards of product quality. Its manufacturing facility is staffed with a workforce of approximately 160 employees, as of March 31, 2024 which includes a team of around 35 engineers dedicated to enhancing operational efficiency.

The Company has on June 15, 2023 entered into an agreement for a term of 3 years with a company engaged into the business of designing and marketing of hardware and software products like laptops, tablets, servers and IT peripherals for the supply of laptops, tablets, motherboards and related PCBA's as per the specification and purchase orders placed by the customer from time to time. It has developed long relationships with certain of customers through a client servicing model which aims to provide integrated solutions, robust manufacturing capabilities and delivering quality products on time. For better quality and customer satisfaction it entrenches with the customers from the conception of their product, and subsequently move up the value chain with them by leveraging its integrated offerings.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden combo book building route IPO of 6578000 equity shares of Rs. 10 each to mobilize Rs. 186.16 cr. (at the upper cap). It has announced a price band of Rs. 269 - Rs. 283 per share. The IPO constitutes 6078000 fresh equity shares (worth Rs. 172.01 at the upper cap) and an Offer for Sale (OFS) of 500000 equity shares (worth Rs. 14.15 cr. at the upper cap). The issue opens for subscription on September 26, 2024, and will close on September 30, 2024. The minimum application to be made is for 400 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 26.32% of the post-IPO paid-up capital of the company. From the net proceeds of the fresh equity issue, the company will utilize Rs. 65.97 cr. for capex on additional plant and machinery at new manufacturing facility, Rs. 22.93 cr. for investment in subsidiary Sahasra Semiconductors Pvt. Ltd., Rs. 40.00 cr. for working capital, and the rest for general corporate purposes.

The issue is solely lead managed by Hem Securities Ltd., Bigshare Services Pvt. Ltd. Is the registrar to the issue, HEM group's Hem Finlease Pvt. Ltd. Is the market maker. 

Having issued initial equity shares at par, the company issued further equity shares at a fixed price of Rs. 202 per share in February 2024. The average cost of acquisition of shares by the promoters/ selling stakeholders is Rs. 10.00 per share. 

Post-IPO, company's current paid-up equity capital of Rs. 18.92 cr. will stand enhanced to Rs. 24.99 cr. Based on the upper cap of IPO price band, the company is looking for a market cap of Rs. 707.30 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last two fiscals, the company has posted a total income/net profit of Rs.  10.64 cr. / Rs. 2.31 cr.  (FY23), Rs. 102.79 cr. / Rs. 32.63 cr. (FY24). Robust top and bottom lines of FY24 is raising eyebrows and concern over sustainability of such margins as it is operating in a highly competitive and fragmented segment. 

For the last three fiscals, it has reported an average EPS of Rs. 13.06 and an average RoNW of 63.16%. The issue is priced at a P/BV of 8.48 based on its NAV of Rs. 33.37 as of March 31, 2024, and at a P/BV of 3.04 based on its post-IPO NAV of Rs. 92.96 per share (at the upper cap).

If we attribute FY24 super earnings to its post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 21.90. Based on FY23 earnings, the P/E stands at 307.61. Thus the issue relatively appears aggressively priced. 

The company reported PAT margins of 11.50% (FY22), 30.60% (FY23-1), 22.10% (FY23-2), 32.26% (FY24), and RoCE margins of 16.30 %, 56.81%, 9.11%, 42.50% for the referred periods, respectively.

DIVIDEND POLICY:
The company has declared 65% dividend for FY24. It has adopted a dividend policy in January 2024, based on its financial performance and future prospects. 

COMPARISION WITH LISTED PEERS:
As per the offer document, the company has shown Kaynes Techno, and Trident Techlabs, as their listed peers. They are trading at a P/E of 167.0, and 155.0 (as of September 20, 2024). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
This is the 57th mandate from Hem Securities in the last three fiscals (including the ongoing one). Out of the last 10 listings, all listed with a premium ranging from 18.18% to 90% on the date of listing.