Spectrum Electrical NSE SME IPO review (May apply)

•    Company is in the field of designing and manufacturing of variety of components.
•    It is likely to face tough competition from unorganized players in the field.
•    Super performance for FY 18 appears to be the result of group company mergers.
•    Issue appears fully priced.
•    LM has poor track record.

ABOUT COMPANY:
Spectrum Electrical Industries Ltd. (SEIL) is an ISO 9001:2015 certified company, engaged in the business of designing and manufacturing of electrical, automobile and irrigation components as contract manufacturers and as component suppliers to leading industry players on Business-to-Business (B2B) model. Company’s focus has been on providing one-stop-shop solutions mainly to manufacturers of electrical products and components in India. It offers integrated design and manufacturing solutions for local and internationally recognised brands in the electrical products industry. Company has developed ability to manufacture most of these products from the concept and design stage up to the final delivery to the customer’s distribution network thereby covering the entire value chain. Thus SEIL offers end-to-end product solutions to its customers under the B2B model wherein it provides services ranging from global sourcing, manufacturing, quality testing and packaging to logistics. Company also offers products in the intermediate stages to many of its customers.

ISSUE DETAILS/CAPITAL HISTORY
To part finance its plans to set up zinc plating plant at Umale, working capital and general corpus fund needs, SEIL is coming out with a maiden IPO of 3980000 equity shares of Rs. 10 each at a fixed price of Rs. 65 per share. Company plans to mobilize Rs.25.87 cr. Issue opens for subscription on 17.09.18 and will close on 21.09.18.Minimum application is to be made for 2000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. Issue constitutes 26.32% of the post issue paid up capital of the company. Issue is solely lead managed by Arihant Capital Markets Ltd. while Bigshare Services Pvt. Ltd. is the registrar to the issue. Having issued initial equity at par, it raised further equity at a price of Rs. 32.70 per share (for a FV of Rs. 10 per share) as a consideration of merger process with group companies on a non-cash basis. Average cost of acquisition of shares by the promoters is Rs. 19.44 per share. Post issue, SEIL’s current paid up equity of Rs. 11.14 cr. will stand enhanced to Rs. 15.12 cr.

FINANCIAL PERFORMANCE:
On financial performance front, for last four fiscals, SEIL has posted turnover/net profits of Rs. 0.14 cr. / Rs. 0.02 cr. (FY15), Rs. 2.16 cr. / Rs. 0.30 cr. (FY16), Rs. 6.60 cr. / Rs. 0.53 cr. (FY17) and Rs. 119.83 cr. / Rs. 5.90 cr. (FY18). SEIL has shown quantum jump in top and bottom line for FY18 ( This appears to be the result of merging of all group companies). For last three fiscals, it has posted an average EPS of Rs. 3.11 and an average RoNW of 12.77%. Issue is priced at a P/BV of 2.15 on the basis of its NAV of Rs. 30.28 as on 31.03.18 and at a P/BV of 1.65 on the basis of post issue NAV of Rs. 39.42. If we consider FY18 super earnings and attribute it on fully diluted equity post issue, then asking price is at a P/E of around 16.67. Issue appears fully priced and sustainability of super earnings shown for FY18 is major concern.

COMPARE WITH LISTED PEERS:
As per offer documents, it has no listed peers to compare with.

MERCHANT BANKER’S TRACK RECORD.
On merchant banker’s front, in last three fiscals, this is the 2nd mandate from its stable after 2016-17. The only listing took place for Nitiraj opened at a discount to offer price on the day of listing. Currently this scrip trades around Rs. 51 against issue price of Rs. 100 per share. Thus it has poor track record.