Shanthala FMCG NSE SME IPO review (Avoid)

•    The company is in retail distribution business in Coorg-Karnataka. 
•    Its financial performance so far has been much below average. 
•    Based on annualized super earnings of FY24, the issue is exorbitantly priced. 
•    There is no harm in skipping this pricey bet. 

ABOUT COMPANY:
Shanthala FMCG Products Ltd. (SFPL) is operating its distributorship business through two proprietary firms viz. M/s. Shanthala Enterprises - Prop. Mrs. Sharada Malya and M/s. Shanthala Traders - Prop. B. Manjunath. 

The Company strives to bring the best global products to its customers by providing last mile connectivity to large consumer product companies. M/s. Shanthala Enterprises- Prop. Mrs. Sharada Malya is still existing as on the date and carries on distribution business in different geography viz. Kushal Nagar

SFPL is a FMCG product distributor for the large size FMCG Companies in India for whom it distributes Branded packaged foods, Personal care products, Education & Stationery products, Matches & Agarbatti and tobacco products. The company is also distributors for one of the largest FMCG MNC Company in India. SFPL distributes branded Beauty & wellbeing, Nutrition, Personal care & Home care products for them. It also distributes Oil, Sugar and Atta for M. K. Agrotech Pvt. Ltd. sold under their brand name Sunpure.

At present its area of operation is in the district of Coorg, Karnataka where customers are scattered across large area which makes it a difficult market to service for new entrants and it has been home for Shanthala and promoters for more than 20 years. As the company has been catering to this place since inception, it has a deeper understanding of customers' needs which makes it indispensable to large consumer companies. As of September 30, 2023, it had 26 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden IPO of 1766400 equity shares of Rs. 10 each at a fixed price of Rs. 91 per share to mobilize Rs. 16.07 cr. The issue opens for subscription on October 27, 2023, and will close on October 31, 2023. The minimum application is to be made for 1200 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 26.36% of the post-IPO paid-up capital of the company. SFPL is spending Rs. 0.57 cr. for this IPO process, and from the net proceeds, it will utilize Rs. 11.50 cr. for working capital, and Rs. 4.00 cr. for general corporate purposes. 

First Overseas Capital Ltd. is the sole lead manager (LM) and Bigshare Services Pvt. Ltd. is the registrar of the issue. BHH Securities Pvt. Ltd. is the market maker (MM) for the company. While LM has underwritten 15.01% of the issue, MM has underwritten the rest. 

Having issued initial equity shares at par, the company issued further equity shares at a fixed of Rs. 340.00 per share in May 2023. It has also issued bonus shares in the ratio of 7 for 1 in July 2023. The average cost of acquisition of shares by the promoters is Rs. 0.00, Rs.1.25 and Rs. 2.77 per share. 

Post-IPO, its current paid-up equity capital of Rs. 4.93 cr. will stand enhanced to Rs. 6.70 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 60.95 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, SFPL has posted a total revenue/net profit of Rs. 39.56 cr. / Rs. 0.14 cr. (FY21), Rs.32.54 cr. / Rs. 0.05 cr. (FY22), and Rs. 40.77 cr. / Rs. 0.18 cr. (FY23). For 5M of FY24 ended on August 31, 2023, it earned a net profit of Rs. 0.10 cr. on a total revenue of Rs. 15.86 cr. 

For the last three fiscals, the company has reported an average EPS of Rs. 2.55 and an average RoNW of 9.38%. The issue is priced at a P/BV of 1.58 based on its NAV of Rs. 57.47 as of August 31, 2023, and at a P/BV of 2.84 based on its post-IPO NAV of Rs. 32.05 per share. 

If we attribute annualized earning of FY24 to post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 252.78. Thus the issue is exorbitantly priced. 

For the reported periods, the company has posted PAT margins of 0.36% (FY21), 0.14% (FY22), 0.43% (FY23), and 0.64% (5M-FY24).  

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

COMPARISON WITH LISTED PEERS:
As per offer document, the company has no listed peers to compare with. 

MERCHANT BANKER'S TRACK RECORD:
This is the 20th mandate from First Overseas in the last three fiscals (including the ongoing one). Out of the last 10 listings, 1 opened at discount, 1 at par and the rest with premiums ranging from 0.42% to 43.53% on the day of listing.