Shri Techtex NSE SME IPO review (May apply)

•    The company is engaged in manufacturing of PP non-woven fabric.
•    Though it posted growth in its top lines for the reported periods, its margins remain under pressure for the last two fiscals. 
•    Based on FY23 earnings, the issue appears reasonably priced.
•    The sustainability of margins remains a major concern going forward.
•    Well-informed/cash surplus investors may park funds with a long-term perspective.  

ABOUT COMPANY:
Shri Techtex Ltd. (STL) is engaged in the business of manufacturing of Polypropylene (PP) Non-Woven Fabric. The practical use of non-woven fabric is more ecological for certain applications, especially in fields and industries where disposable or single-use products are important, such as organic farming, hospitals, health care, nursing homes, home furnishing, vehicle upholstery seat fabrication, Mattress & furniture covering, ecological packaging, industrial and consumer goods. It manufactures PP non-woven fabric in a variety of sizes and density. As of the date of this Red Herring Prospectus, STL manufactures PP non-woven fabric up to 4.5 meters in size and 15 GSM to 800 GSM.

Its manufacturing facility is situated at Simaj of Dholka Taluka in Ahmedabad District of Gujarat. To date, STL's existing manufacturing vertical has been catering majorly to offshore customers. In the last 3 years, the company has derived revenue from exports to countries namely the USA, Taiwan, Canada, Denmark and China. However, recently, the company has started focusing more on the domestic market for products manufactured by it. 

In order to improve its product portfolio, STL is planning for business expansion by adding new business lines viz—manufacturing of Hot Melt Coating Lamination and PP Multifilament Yarn. The company expects both machineries to be ready for commercial production by April 2024 having installed capacity of 3360 tons and 1200 tons per annum respectively. As of June 30, it had 98 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden IPO of 7400000 equity shares of Rs. 10 each via a book-building route with a price band of Rs. 54 - Rs. 61 per share of Rs. 10 each to mobilize Rs. 45.14 cr. at the upper cap. The issue opens for subscription on July 26, 2023, and will close on July 28, 2023. The minimum application to be made is for 2000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 29.66% of the post-IPO paid-up capital of the company. 

After reserving 372000 equity shares for the market maker, the company has allocated 3510000 equity shares for QIBs (including Anchor portion), 1056000 equity shares for HNIs, and 2462000 shares for Retail investors. 

From the net IPO fund proceeds, it will utilize Rs. 3.71 cr. for the construction of the factory shed, Rs. 6.31 cr. for the purchase of machinery, Rs. 4.90 cr. for commissioning solar plant, Rs. 15.31 cr. for working capital and the balance for general corporate purposes. 

Beeline Capital Advisors Pvt. Ltd. is the sole lead manager and Link Intime India Pvt. Ltd. is the registrar of the issue. Sunflower Broking Pvt. Ltd. is the market maker for the company. 

The company has issued initial equity shares at par value and has also issued bonus shares in the ratio of 68 for 10 in December 2022. The average cost of acquisition of shares by the promoters is Rs. 0.01 and Rs. 1.75 per share. 

Post-IPO, STL's current paid-up equity capital of Rs. 17.55 cr. will stand enhanced to Rs. 24.95 cr.  Based on the upper price band of the IPO price, the company is looking for a market cap of Rs. 152.20 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, STL has posted a turnover/net profit of Rs. 40.22 cr. / Rs. 12.66 cr. (FY21), Rs. 51.82 cr. / Rs. 8.27 cr. (FY22), and Rs. 58.08 cr. / Rs. 9.11 cr. (FY23). Super earnings for FY21 raise eyebrows and the reduction in employee benefits in the last three fiscals as well as the hike in the cost of materials for the said period are the points of concern. 

For the last three fiscals, STL has reported an average EPS of Rs. 5.37 and an average RoNW of 38.56%. The issue is priced at a P/BV of 3.59 based on its NAV of Rs. 16.99 as of March 31, 2023. Data of post-IPO NAV is missing from the IPO ad and documents. 

If we attribute FY23 earnings to post-IPO fully diluted paid-up equity, then the asking price is at a P/E of 16.71. Thus the IPO appears reasonably priced. However, its margin sustainability is a major concern going forward. 

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, the company has shown Garware Technical and Shubham Poly as their listed peers. They are currently trading at a P/E of 39.56, and 30.41 (as of July 21, 2023). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
This is the 15th mandate from Beeline Capital in the last two fiscals (including the ongoing one). Out of the last 10 listings, 1 opened at par and the rest listed at premiums ranging from 0.39% to 85.71% on the listing date.