SP Refractories NSE SME IPO review (Avoid)

•    SPRL operates in a highly competitive and fragmented segment. 
•    Super profits for H1-FY22 raises concern about sustainability.
•    The issue is fully priced even based on its super recent earnings. 
•    Tiny post-IPO paid-up capital indicates longer gestation for migration.
•    There is no harm in ignoring this IPO. 

ABOUT COMPANY:
SP Refractories Ltd. (SPRL) is engaged in manufacturing and supplying Refractory Material made using hydrated lime, Calcined Alumina and other raw materials. Its core focus is on refractory cement which is a niche and high margin cement widely used in iron & steel and construction industries because of its thermal conductivity, Maximum strength and Heat resistance.

The Company began its operations in the year 2007 with the manufacturing of refractory cement and castables. It has one Manufacturing facility at M- 10, MIDC, Hingna, Nagpur and the adjoining premise M- 11-1 & M-11-2, MIDC, Hingna, Nagpur is being used as a godown and storage facility. The manufacturing facility is located in MIDC which is a well-developed industrial area of Nagpur.

As claimed by the management, SPRL has a healthy client base due to its quality product, customized solutions and large product line. It has a clinkers manufacturing capacity of 4000 MT per year and a Clinkers crushing capacity of 6000 MT per year. SPRL gets clinkers manufactured from outsiders on a job work basis and thereafter process of crushing the clinkers, blending and packing of refectory cement in powder form carries out in its manufacturing facility for excess capacity of crushing. Further, as and when required the company purchases clinkers from a third party and carry out the process of crushing the clinkers, blending and packing of refectory cement in powder form to utilize excess capacity of crushing. As of September 30, 2021, it had 22 employees on its payroll.

It has dedicated semi-automatic machines and skilled operators for manual checking of raw materials as well as Finished Goods. SPRL's Testing and QC Technical team combined with its testing equipment ensure the quality of raw material dispensed in the production process and also the finished goods delivered to customers. This helps in improving the procurement process thus reducing wastages, returns and other related costs.

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its needs for working capital (Rs. 2.21 cr.) and general corporate purpose (Rs. 0.17 cr.), the company is coming out with a maiden combo IPO of 547200 equity shares of Rs. 10 each at a fixed price of Rs. 90 per share to mobilize Rs. 4.93 cr. SPRL is issuing 297600 fresh equity shares worth Rs. 2.68 cr. and also an offer for sale of 249600 shares worth Rs. 2.25 cr. The issue opens for subscription on March 09, 2022, and will close on March 11, 2022. A minimum application is to be made for 1600 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 30.58% of the post issue paid-up capital of the company. SPRL is spending Rs. 0.49 cr. for this entire IPO process. 

The issue is solely lead managed by Aryaman Financial Services Ltd. (AFSL) and Bigshare Services Pvt. Ltd. is the registrar to the issue. Aryaman Capital Markets Ltd. is the market maker for this company. 

Having issued initial equity at par, SPRL issued further equity at a price of Rs. 20 per share in December 2007 and has also issued bonus shares in the ratio of 2 for 1 in March 2021. The average cost of acquisition of shares by the promoters is Rs. 3.76, Rs. 4.55 and Rs. 6.64 per share. 

Post this IPO, SPRL's current paid-up equity capital of Rs. 1.49 cr. will stand enhanced to Rs. 1.79 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 16.11 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, SPRL has posted turnover/net profits of Rs. 18.56 cr. / Rs. 0.21 cr. (FY19), Rs. 21.00 cr. / Rs. 0.40 cr. (FY20) and Rs. 25.72 cr. / Rs. 0.75 cr. (FY21). For the first half of FY22 ended on September 30, 2021, it has earned a net profit of Rs. 0.81 cr. on a turnover of Rs. 14.48 cr.  A sudden boost in net earnings for the IPO year raises eyebrows as it appears like window dressing to pave the way for fancy valuations. 

For the last three fiscals, it has posted an average EPS of Rs. 3.65 and an average RoNW of 12.44%. The issue is priced at a P/BV of 2.50 based on its NAV of Rs. 36.02 as of September 30, 2021, and at a P/BV of 2.00 based on its post-issue NAV of Rs. 44.99. 

If we annualize FY22 earnings and attribute it on post-issue fully diluted equity, then the asking price is at a P/E of 9.94 and based on its FY21 earnings, it stands at a P/E of 21.48 (making fully priced). 

DIVIDEND POLICY:
The company has not declared any dividend for the reported periods of the offer documents. It will adopt a prudent dividend policy post listing based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per offer documents, SPRL has shown Morganite Crucibles, Rhi Magnesita, IFGL Refractories and Rassi Refractories as its listed peers. They are currently trading at a P/E of 16.95, 40.01, 25.89 and 18.83 (as of March 04, 2022). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S PERFORMANCE TRACK RECORDS:
This is the 18th mandate from AFSL in the last three fiscals (including the ongoing one). Out of the last 10 listings, 1 opened at discount and the rest with premiums ranging from 0.36% to 6.81% on the day of listings.