Shelter Pharma BSE SME lPO review (Avoid)

•    SPL is in the manufacturing and marketing of herbal products. 
•    Its boosting performance from a loss for FY21 to super profits for FY23 raises eyebrows.
•    Based on its bumper earnings of FY23 the issue appears lucratively priced. 
•    The sustainability of super margins going forward is a major concern. 
•    Its comparison with Dabur and Emami appears to be an eyewash.
•    There is no harm in skipping this tempting IPO. 

ABOUT COMPANY:
Shelter Pharma Ltd. (SPL) primarily focuses on manufacturing herbal products in the Human as well as veterinary space. In the Human pharma segment, it has a product portfolio of OTC as well as Ethical Pharma products and similar products for the veterinary segment.  

The company sources its raw materials i.e. herbal plants from the nearby regions and markets them in rural/semi-urban areas with price-competitive quality remedies. The company is marketing its products under "Shelter" brand. As of the date of filing this offer document, it had 18 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden IPO of 3816000 equity shares of Rs. 10 each at a fixed price of Rs. 42 per share to mobilize Rs. 16.03 cr. The issue opens for subscription on August 10, 2023, and will close on August 14, 2023. The minimum application is to be made for 3000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. The issue constitutes 33.01% of the post-IPO paid-up capital of the company. SPL is spending Rs. 1.15 cr. for this IPO process and from the net proceedings, it will utilize Rs. 14.00 cr. for working capital, and Rs. 0.88 cr. for general corporate purposes.

Gretex Corporate Services Ltd. is the sole lead manager and Bigshare Services Pvt. Ltd. is the registrar of the issue. Gretex Group's Gretex Share Broking Pvt. Ltd. is the market maker for the company. 

After issuing initial equity shares at par, the company issued/converted further equity shares in the price range of Rs. 160 - Rs. 666.83 per share between January 2013 and September 2020. It has also issued bonus shares in the ratio of 15 for 1 in February 2023. The average cost of acquisition of shares by the promoters is Rs. - (12.57), and Rs. 1.48 per share. 

Post-IPO, SPL's current paid-up equity capital of Rs. 7.74 cr. will stand enhanced to Rs. 11.56 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 48.55 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, SPL has posted a turnover/net profit - (loss) of Rs. 22.49 cr. / Rs. - (0.24) cr. (FY21), Rs. 30.06 cr. / Rs. 1.84 cr. (FY22), and Rs. 36.16 cr. / Rs. 5.78 cr. The sudden boost in its bottom line for FY23 appears to be a window dressing.  

There appears to be some mismatch as the company has shown EPS and RoNW data based on pre-bonus and post-bonus are the same. Such a miss-match raises concerns over transparency. 

On a pre-bonus basis, the company has posted an average EPS of Rs. 15.54 and an average RoNW of 26.23%. EPS data has to differ on a post-bonus basis, but since the company has suppressed this data, the issue appears lucratively priced and this is nothing but an eyewash. 

Even the NAV details have a mismatch as it shows the same on a pre and post-bonus basis (Refer to pages no. 76 and 77 of the offer document). Based on the given data of NAV, the issue is priced at a P/BV of 2.24 based on its NAV of Rs. 18.74 as of March 31, 2023, and at a P/BV of 1.68 based on its post-IPO NAV of Rs. 25.07 per share. 

If we attribute its super earnings of FY23 to post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 8.4. The sustainability of such superior margins going forward is a major concern. Though the issue appears lucratively priced, clarity from the management on super profits is needed. FY23 financial data appears to have been window dressing. 

DIVIDEND POLICY:
The company has not declared any dividends since incorporation. It will adopt a prudent dividend policy post-listing, based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per the offer document, surprisingly this company has shown Dabur India and Emami Ltd. as their listed peers. They are currently trading at a P/E of 71.51, and 10.55 (as of August 08, 2023). However, they are not truly comparable on an apple-to-apple basis.  

MERCHANT BANKER'S TRACK RECORD:
This is the 16th mandate from Gretex Corporate in the last three fiscals (including the ongoing one). Out of the last 10 listings, 2 opened at discount, 1 at par and the rest listed at premiums ranging from 1.31% to 90% on the listing date.