SBC Exports BSE SME IPO review (Avoid)

•    SBC has diverse activities and majorly catering to domestic markets.
•    Posted sudden boost in earnings in pre-IPO years.
•    Offer documents do not reflect the diluted impact of equity in re-stated accounts.
•    The Issue is priced aggressively on the basis of robust earnings in the last two fiscals.

ABOUT COMPANY:
SBC Exports Ltd. (SBC) that was initially engaged in the trading of handmade carpets, cushion covers, cotton quilts, bedspreads etc off late diversified into trading of hosiery textile fabrics and garments, information technology, manpower supply services, as well as Tour and Travels services. In the year 2017, it set up its own manufacturing unit for hosiery fabrics/garments. It sells its products under brand names such as 'SBC Desing+', 'SBC F-Route', 'IEDEE'.

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its needs for working capital (Rs. 5.10 cr.), general corpus funds (Rs. 0.96 cr.), SBC is coming out with a maiden IPO of 2982000 equity shares of Rs. 10 each at a fixed price of Rs. 22 per share to mobilize Rs. 6.56 cr. The issue opens for subscription on 24.06.19 and will close on 26.06.19. Minimum application is to be made for 6000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. Issue constitutes 28.18% of the post issue paid up capital of the company. SBC is spending Rs. 0.50 cr. for this issue process.

The issue is solely lead managed by Navigant Corporate Advisors Ltd. while Bigshare Services Pvt. Ltd. is the registrar to the issue.  Nikunj Stock Broker Ltd. is acting as Market Maker for this issue.

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

Post issue, SBC's current paid up equity capital of Rs. 7.60 cr. will stand enhanced to Rs. 10.52 cr.

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, SBC has posted turnover/net profits of Rs. 21.16 cr. / Rs. 0.07 cr. (FY16), Rs. 28.69 cr. / Rs. 0.33 cr. (FY17) and Rs. 64.21 cr. / Rs. 0.83 cr. (FY18). For the 9MFY19 it has earned net profits of Rs. 0.69 cr. on a turnover of Rs. 58.52 cr. SBC's major sales happening in domestic markets with cut-throat competition and pressure on margins. The sudden spurt in the top and bottom lines in pre-IPO years raises concern.

As per offer documents, the company is showing the last three years' average EPS and RoNW on the basis of paid-up equity capital of Rs. 0.10 cr. for FY16, FY17 and FY18 that stands at Rs.53.53 and 52.44% respectively. In fact, it has not reflected (or considered) its current paid-up equity of Rs. 7.60 cr. (as on 31.12.18) for the said data and hence it does not reflect the true status.  Even for P/E and NAV is also calculated on the same basis. (It shows P/E of 8.46 and NAV of Rs. 45.38 as at 31.12.2018)

If we annualize latest earnings and attribute it on fully diluted equity post issue, then asking price is at a P/E of around 25, thus the issue is priced aggressively.

COMPARISION WITH LISTED PEERS:
AS per offer documents, it has shown Monte Carlo, Vardhman Textiles, Page Ind. And Jet Knitwear as its listed peers that are currently trading at a P/Es of around 10, 9, 59 and 8 (as on 21.06.19). They are strictly not comparable on an apple to apple basis.

MERCHANT BANKER'S TRACK RECORDS:
On merchant banker's front, this is the 16th mandate from its stable in the last four fiscals. Out of last 10 listings, 2 opened at discount and the rest with a premium ranging from 1.25%to 20% on the day of listing.