Shivam Chemicals BSE SME IPO review (Avoid)

•    The company is in Hydrated Lime manufacturing and is a distributor for poultry/animal feed products. 
•    It has posted inconsistency in its top and bottom lines for the reported periods. 
•    From FY23, its top and bottom lines are showing degrowth. 9M-FY24 marked poor performance. 
•    Based on FY24 annualized earnings, the issue appears exorbitantly priced. 
•    There is no harm in skipping this "High Risk/Low Return" bet.

ABOUT COMPANY:
Shivam Chemicals Ltd. (SCL) is a manufacturer of Hydrated Lime (Calcium Hydroxide) & a distributor of various products such as Poultry feed supplement (MBM), Di-Calcium Phosphate (Feed Grade), Magnesium Oxide, Limestone Powder, etc. With rich experience and knowledge, it has built a well-established marketing network across India and it distributes animal feed products for various well renowned manufacture over the years. 

With an average monthly sales volume of 2,650 metric tons, it maintains a consistent presence and contribute to the steady flow of products in the market. Its journey began with a primary focus on animal feed supplement trading till FY 2022-23 and its evolution into manufacturing is happened through the establishment of a 100% owned subsidiary.

SCL's wholly owned subsidiary company Shivam Chemicals and Minerals Private Limited is located at Dahej Gujarat with a manufacturing capacity of 60,000 MT. They are engaged in manufacturing of Hydrated lime (Calcium hydroxide) product. As of December 31, 2023 it had 25 employees on a consolidated basis. It has 12 contracts labours in its subsidiary company i.e. Shivam Chemicals and Minerals Private Limited.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden IPO of 4587000 equity shares of Rs. 10 each at a fixed price of Rs. 44 per share to mobilize Rs. 20.18 cr. The issue opens for subscription on April 23, 2024, 2024, and will close on April 25, 2024. The minimum application to be made is for 3000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. The issue constitutes 27.00% of the post-IPO paid-up capital of the company. The company is spending Rs. 2.50 cr. for this IPO process and from the net proceeds of the IPO, it will utilize Rs. 7.05 cr. for working capital, Rs. 5.62 cr. for investment in subsidiary - Shivam Chemicals & Minerals Pvt. Ltd., and Rs. 5.01 cr. for general corporate purposes. 

The issue is solely lead managed by Aryaman Financial Services Ltd., and Cameo Corporate Services Ltd. is the registrar of the issue. Shreni Shares Ltd. is the market maker for the company.  While Aryaman Financial has underwritten the issue to the tune of 94.96%, Shreni Shares has underwritten for 5.04%. 

The company has issued entire equity capital at par value so far and has also issued bonus shares in the ratio of 30 for 1 in September 2023. The average cost of acquisition of shares by the promoters is Rs. NIL, and Rs. 0.32 per share. 

Post-IPO, company's current paid-up equity capital of Rs. 12.40 cr. will stand enhanced to Rs. 16.99 cr. Based on the upper IPO price band, the company is looking for a market cap of Rs. 74.74 cr.  

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has posted a total income/net profit of Rs. 95.58 cr. / Rs. 0.87 cr. (FY21), Rs. 177.99 cr. / Rs. 4.44 cr. (FY22), (standalone for FY21 and FY22) and Rs. 156.58 cr. / Rs. 3.57 cr. (FY23), For 9M of FY24, it earned a net profit of Rs. 0.71 cr. on a total income of Rs. 107.11 cr. - on a consolidated basis from FY23 onwards. Thus the company marked inconsistency in its top and bottom lines for the reported periods. 

For the last three fiscals, it has reported an average EPS of Rs. 2.75, and an average RONW of 31.41%. The issue is priced at a P/BV of 3.90 based on its NAV of Rs. 11.29 as of December 31, 2023, and at a P/BV of 2.19 based on its post-IPO NAV of Rs. 20.12 per share.

If we attribute annualized FY24 earnings to its post-IPO fully diluted paid-up capital, then the asking price is at a P/E of 78.57. Based on FY23 earnings, the issue is priced at a P/E of 20.95. Thus the issue appears aggressively priced. 

For the reported periods, the company has posted PAT margins of 0.91% (FY21), 2.49X% (FY22), 2.33% (FY23), 0.66% (9M-FY24), and RoCE margins of 23.84%, 42.35%, 19.88%, 6.19% respectively for the referred periods. 

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

COMPARISON WITH LISTED PEERS:
As per the offer document, the company has shown Narmada Agro and Godrej Agrovet as their listed peers. They are trading at a P/E of 54.7 and 33.3 (as of April 19, 2024). However, they are not comparable on an apple-to-apple basis.

MERCHANT BANKER'S TRACK RECORD:
This is the 13th mandate from Aryaman Financial 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 0.29% to 31.15% on the date of listing.