Shreenath Paper BSE SME IPO review (Avoid)

•    The company is in the business of supplying variety of paper and related products.
•    It largely depends on third party supply.
•    The company posted inconsistency in its top and bottom lines for the reported periods.
•    It is operating in a highly competitive and fragmented segment.
•    Based on its recent financial performance, the issue appears aggressively priced.
•    There is no harm in skipping this pricey and risk bearing offer. 

ABOUT COMPANY:
Shreenath Paper Products Ltd. (SPPL) is primarily engaged in the business of providing supply chain solution to industries where paper such as, coating based paper, food grade paper, machine glazed paper, pressure sensitive adhesive paper, forms a major part of their raw materials. Accordingly, it supplies different kinds of paper such as sublimation base paper, thermal base paper, straw paper, paper for cone sleeve, cup stock paper, poster paper, security PSA sheet, transcode PSA sheet, filmic & digital PSA sheet, removable PSA sheet, permanent PSA sheet, C2S paper and board, C1S paper, hi-bright paper, low- bright paper, High-Strength Paper, etc.

Its business comprises of understanding the specific requirements of client, curate the technical specification based on their requirements, identify manufacturer who specialise in the required paper, place order, test the sample, procure the material in the desired quantity and supply to customers. It offers paper in different grades ranging from 24-350 grams per square meter (‘GSM’), which is manufactured from waste recycled papers, bagasse base (agricultural waste) and virgin pulp.

The paper products manufactured by customers have a variety of end use applications and are used in industry such as FMCG, textiles, heat sensitive printers like ATM and POS Paper, restaurants, food and beverages industry automobiles, e-commerce, pharmaceuticals, white goods packaging industry, security labels, advertising industries, educational sector, utensils industry, commercial printing industry, publication industry, other packaging items for industrial and household purpose, paper bags, etc. The company sells papers in the domestic markets specially in the state of Maharashtra, Gujarat and Madhya Pradesh. As of December 31, 2024, it had 9 employees on its payroll and 6 contract labours.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden IPO of 5310000 equity shares at a fixed price of Rs. 44 per share to mobilize Rs. 23.36 cr. The issue opens for subscription on February 25, 2025, and will close on February 28, 2025. The minimum number of shares to be applied is for 3000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. The issue constitutes 27.02% of the post-IPO paid-up capital of the company. The company is spending Rs. 2.49 cr. for the equity issue, and from the net proceeds, the company will utilize Rs. 18.00 cr. for working capital, and Rs. 2.87 cr. for general corporate purposes. Higher spending for equity issue indicates funding arrangement and the issue is fully structured.

The IPO is solely lead managed by Galactico Corporate Services. Ltd., Bigshare Services Pvt. Ltd., is the registrar to the issue. Pure Broking Pvt. Ltd. is the Market Makers for the company. 

Having issued initial equity shares at par value, the company issued further equity shares in the price range of Rs. 25 – Rs. 800 per share between March 2012, and October 2023. It has also issued bonus shares in the ratio of 17 for 1 in December 2023. The average cost of acquisition of shares by the promoters is Rs. NIL, Rs. 0.58, Rs. 1.12, Rs. 1.36, Rs. 1.39, Rs. 11.41, and Rs. 13.52 per share. 

Post-IPO, company’s current paid-up equity capital of Rs. 14.34 cr. will stand enhanced to Rs. 19.65 cr. Based on the upper price band of the IPO, the company is looking for a market cap of Rs. 86.48 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has posted a total income/net profit of Rs. 141.75 cr. / Rs. 1.34 cr. (FY22), Rs. 206.70 cr. / Rs. 4.38 cr. (FY23), and Rs. 189.67 cr. / Rs. 4.39 cr. (FY24). For 9M of FY25 ended on December 31, 2024, it earned a net profit of Rs. 2.41 cr. on a total income of Rs. 78.62 cr. The quantum jump in bottom lines from FY23 onwards raises eyebrows and concern over its sustainability. For 9M of FY25 indicates degrowth in its top lines as well as bottom lines. Higher trade receivables and borrowings as of December 31, 2024, raises alarm. 

For the last three fiscals, the company has reported an average EPS of Rs. 2.71 and an average RoNW of 29.40%. The issue is priced at a P/BV of 2.96 based on its NAV of Rs. 14.88 as of December 31, 2024, and at a P/BV of 1.93 based on its post-IPO NAV of Rs. 22.74 per share. 

If we attribute FY25 annualized super earnings on post-IPO fully diluted equity capital, then the asking price is at a P/E of 26.99. Based on FY24 earnings, the P/E stands at 19.73. Based on its recent earnings, prima facie, the issue relatively appears aggressively priced. 

For the reported periods, the company has posted PAT margins of 0.98% (FY22), 2.14% (FY23), 2.36% (FY24), 3.12% (9M-FY25), and RoCE margins of 16.61%, 24.16%, 19.32%, 10.80%, for the referred periods, respectively. 

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. 

COMPARISION WITH LISTED PEERS:
As per the offer document, the company has shown JK Paper, Star Paper Mills, Seshasayee Paper, as their listed peers. They are trading at a P/E of 8.20, 5.14, and 14.4 (as of February 21, 2025). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER’S TRACK RECORD:
This is the 2nd mandate from Galactico Corporate in the last five fiscals.  The only listing so far opened at discount on the date of listing.