Salasar Exteriors NSE SME Emerge IPO review (Avoid)

•    A proprietorship unit just turned corporate.
•    It has just 11 months working post-conversion into a company.
•    Based on financial data so far, the issue is priced aggressively.
•    It has pending orders worth Rs. 87.60 cr. as on 20.08.19.

ABOUT COMPANY:
Salasar Exteriors & Contour Ltd. (SECL) is well recognized and award-winning for Interior and Exterior Work with expertise in corporate offices, Commercials, Budget Hotels, Residential, Hospitals, Hostels, Departmental stores and Healthcare projects.
Interior designing & execution is the art and science of enhancing the interior of an edifice to achieve a healthier and more aesthetically pleasing environment for the people using the space. The Company plans, researches, coordinates& execution, and manages such projects. SECL is into a multifaceted profession that includes conceptual development, space planning, site inspections, programming, research, communicating with the Teams of a project, construction management, and execution as per planning

It undertakes projects on turnkey basis where the company involves right from creation of the structure to implementation of plans along with installation and providing of other allied interior finishing, furniture mechanical, electrical, plumbing (MEP) and services. As on 20.08.19, it had 87 full-time employees and 34 other workers/contractors/architects etc

SECL is one of the esteemed facilitators of Walmart which has recently entered into India. The company is engaged into execution and carving out of Departmental Stores for Walmart and have already completed 3 (three) stores in Bhopal, Amravati and Aurangabad and work in progress at INDORE & NIZAMABAD. It is still bidding for obtaining the contracts for further designing and construction of departmental stores for the foreign retail giant and positively expect to complete a mark of at least 10 (Ten) more stores. SECL is also doing work for clients like Ginger Hotels, Holiday Inn, RTF projects, Tata Memorial Hospital, Delhi Metro Rail etc.

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its working capital (Rs. 6.30 cr.), general corporate funds (Rs. 1.70 cr.) needs, SECL is coming out with a maiden IPO of 2360000 equity shares of Rs. 10 each at a fixed price of Rs. 36 per share to mobilize Rs. 8.50 cr. Minimum application is to be made for 3000 shares and in multiples thereon, thereafter. The issue opens for subscription on 28.08.19 and will close on 03.09.19. Post allotment, shares will be listed on NSE SME Emerge. Issue constitutes 28.66% of the post issue paid-up capital of the company. SECL is spending Rs. 0.50 cr. for this IPO proceeds.

The issue is solely lead managed by Navigant Corporate Advisors Ltd. while Karvy Fintech Pvt. Ltd. is the registrar to the issue. NNM Securities Pvt. Ltd. is acting as a market maker for this IPO. Having issued initial equity at par, it also converted 4124868 equity shares at par and 1650000 shares at a consideration of Rs. 36 per share in September 2018. The average cost of acquisition of shares by the promoters is Rs. 6.90 and Rs. 34.72 per share. Post issue SECL's current paid-up equity capital of Rs. 5.88 cr. will stand enhanced to Rs. 8.24 cr.

FINANCIAL PERFORMANCE:
SECL has shown just 11 months working for FY19. For the period ended on 28.02.19, it has earned a net profit of Rs. 1.03 cr. on a turnover of Rs. 41.62 cr. It has no other financial data in offer documents. For the said period, it has shown EPS of Rs. 3.74 and RoNW of 9.24%. The issue is priced at a P/BV of 1.89 on the basis of its NAV of Rs. 19.06 as on 28.02.19 and at a P/BV of 1.51 on the basis of post-issue NAV of Rs. 23.92. At the time of filing the final prospectus, SECL has pending orders worth Rs. 87.6 cr. as on 20th Aug. 2019.

However, if we annualize latest earnings and attribute it on fully diluted post issue equity then the issue is priced at a P/E of around 26 thus issue appears aggressively priced.

As a proprietorship concern under the banner of Salasar Exteriors, the company has shown rising trends in the top and bottom lines with inconsistent margins. (Refer p 154 to 157 of the offer document). The sudden boost in net profit for FY 18 raises eyebrows.

COMPARISION WITH LISTED PEERS:
As per offer documents, SECL is showing Ahluwalia Contracts, JMC Projects and Capacite Infra as its listed peers.  They are currently trading at a P/Es of around 19, 13 and 12 (as on 23.08.19). However, they are not strictly comparable on an apple to apple basis.

MERCHANT BANKERS TRACK RECORDS:
This is the 18th mandate from merchant banker in last four fiscals (including the ongoing FY19-20). Out of last 10 listings, 1 opened at a discount to offer price, 1 at par and the rest with premiums ranging from 1.25% to 20%. Thus it has average track records.