Srivari Spices NSE SME IPO review (Apply)

•    SSFL is in the business of spices and flour manufacturing and marketing.
•    It is gearing to create a niche place in a highly competitive and fragmented segment. 
•   Based on its super earnings the issue appears reasonably priced, and management is confident of maintaining trends going forward with the introduction of more premium products.
•    The IPO ad is missing post-IPO NAV data.
•    Investors may park funds with the medium to long-term perspectives. 

ABOUT COMPANY:
Srivari Spices & Foods Ltd. (SSFL) is engaged in the business of manufacturing spices and flour (chakki atta) and markets & sells them in and around Telangana and Andhra Pradesh. It handpicks raw materials from various parts of the country and processes its products with utmost care without the use of artificial preservatives or chemicals, thereby creating a product portfolio of organic spices and flour, which carry the freshness and goodness of each ingredient. 

SSFL's unique business model has helped it penetrate the niche segment of the market and establish a customer base in and around Telangana and Andhra Pradesh. Its goal since incorporation was to manufacture quality spices and other food products which are organic and do not contain any artificial preservatives or chemicals. 

SSFL's business has two models first is direct to customer ("D2C") in nature, wherein it delivers products directly to the doorstep of customers using approximately 15,000 retail stores. Secondly, it also works in business-to-business ("B2B''), wherein it delivers products to the suppliers. 

The company started business operations in 2019 by setting up a state-of-the-art production facility at Survey numbers 234/4, and 234/5, Jalpally Village, Balapur Mandal, Jalpally Municipality, Ranga Reddy District, Telangana and manufacturing turmeric powder (haldi), chilli powder (mirchi) and coriander powder (dhaniya). In December 2021, it expanded business operations by diversifying its product portfolio into madras sambar masala, chicken masala, garam masala and mutton masala in pouches, boxes and bottles. In the year 2021, the company expanded its business operations by setting up a new manufacturing unit at Raikal Village, Farooqnagar Mandal, Ranga Reddy District, Telangana. Lastly, in October 2022 it introduced a new product category by manufacturing whole wheat flour (chakki atta). As of March 31, 2023, it had 94 employees on its payroll. 

According to the management, they have lined up over a dozen new products to scale up their top and bottom lines as they are looking for high-quality, preservative-free organic products at an affordable premium price. It has also scheduled users' awareness on how to use and cook hygienic foods at their homes with the usage of Srivari Products. The company is also putting major thrust on B2C (high margin segment), versus B2B trades. This will bring more rewards for the company going forward. Though the company is currently a southern region-centric player, it has plans afoot to increase its footprints on a Pan-India basis in the coming years.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden book-building route IPO of 2142000 equity shares of Rs. 10 each. It has announced a price band of Rs. 40 - Rs. 42 per share and mulls mobilizing Rs. 9.00 cr. at the upper cap. The issue opens for subscription on August 07, 2023, and will close on August 09, 2023. The minimum application to be made is for 3000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 29.99% of the post-IPO paid-up capital of the company. 

After reserving 108000 shares for the market maker, the company has allocated not more than 1014000 shares for QIBs, not less than 306000 shares for HNIs and not less than 714000 shares for Retail investors. From the net proceeds of the IPO funds, it will utilize Rs. 5.93 cr. for working capital and the rest for general corporate purposes. 

GYR Capital Advisors Pvt. Ltd. is the sole lead manager, Bigshare Services Pvt. Ltd. is the registrar of the issue and Nikunj Stock Brokers Ltd. is the market maker for the company. 

As per capital history, the company has issued entire equity shares at a par value so far. Due to the internal acquisition of shares in the price range of Rs. 11 - Rs. 13 per share between March 2022 and November 2022, the average cost of acquisition of shares by the promoters is Rs. 11.30, and Rs. 11.84 per share. 

Post-IPO, SSFL's current paid-up equity capital of Rs. 5.00 cr. will stand enhanced to Rs. 7.14 cr. Based on the upper price band of the IPO, the company is looking for a market cap of Rs. 30.00 cr. The small equity base post-IPO may lead to longer gestation for migration to the mainboard.

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, SSFL has posted a turnover/net profit of Rs. 11.40 cr. / Rs. 0.35 cr. (FY21), Rs. 17.64 cr. / Rs. 0.73 cr. (FY22), and Rs. 35.82 cr. / Rs. 3.13 cr. (FY23). After static performance for FY21 and FY22, the sudden boost in its top and bottom lines for FY23 raises eyebrows and concern over the sustainability going forward. Its profit margins have increased from 3.09% for FY21 to 8.73% for FY23. According to management, the new premium product launch has helped the company to post spectacular performance for FY23 and has expressed confidence in maintaining the trends in the coming years. 

For the last three fiscals, SSFL has reported an average EPS of Rs.4.45 and an average RoNW of 24.79%. The issue is priced at a P/BV of 2.31 based on its NAV of Rs. 18.20 as of March 31, 2023, and its IPO ad is silent on its post-IPO NAV data. 

If we attribute FY23 bumper earnings to post-IPO fully diluted paid-up equity capital of the company, then the asking price is at a P/E of 9.59, thus the IPO is reasonably priced.

As of March 31, 2023, it has an outstanding loan of Rs. 9.98 cr., while it increased to Rs. 12.83 cr. for a pre-issue period. This remains the point of concern.

DIVIDEND POLICY:
The company has not declared any dividends for the reported periods of the offer document. 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 Contil India, and Jetmall Spices as their listed peers. They are currently trading at a P/E of 45.30, and 46.82 (as of August 02, 2023). However, they are not truly comparable on an apple-to-apple basis.  

MERCHANT BANKER'S TRACK RECORD:
This is the 15th mandate from GYR Capital in the last three fiscals (including the ongoing one). Out of the last 10 listings, all were listed at premiums ranging from 0.38% to 151.10% on the listing date.