Supreme Power NSE SME IPO review (May apply)

•    SPEL is in the business of transformers for all sort of applications.
•    It marked robust growth in its top and bottom lines from FY23 onwards.
•    It is operating in a highly competitive segment with many players. 
•    Trade receivables of Rs. 45.64 as of July 31, 2023 raise concern.
•    Based on FY24 annualized super earnings, the issue appears reasonably priced.
•    Well informed investors may park funds for the medium to long term. 

ABOUT COMPANY:
Supreme Power Equipment Ltd. (SPEL) is currently engaged in the areas of manufacturing, up-gradation, and refurbishment of transformers ranging from Power Transformer, Generator Transformer, Windmill Transformer, Distribution Transformer, Isolation Transformer, Solar Transformer, Energy Efficient Transformer, Converter and Rectifier Transformer.

It is an ISO 9001:2015 company, in the area of Design, Manufacture, Services and Supply of Transformer. The company also has ISO 14001:2015 certificate in the area of Design, Manufacture, Services and Supply of Transformers. Also, the Company is ISO 45001:2018 certified in the area of Design, Manufacture, Services and Supply of Transformers. SPEL has its Quality Management System certified by TUV/QACS. CPRI ("Central Power Research Institute") has type tested its transformers up to 25MVA/110kV Voltage Class. Right from manufacturing to distribution, it has consistently delivered competitive edge in the form of robust, foresighted, and quality products. As of July 31, 2023, it had 58 employees on its payroll.  Its trade receivables worth Rs. 45.64 cr. as of July 31, 2023 raise concern. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden book building route IPO of 7180000 equity shares of Rs. 10 each. It has announced a price band of Rs. 61 - Rs. 65 per share and mulls raising Rs. 46.67 cr. at the upper cap. The issue opens for subscription on December 21, 2023, and will close on December 26, 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 28.73% of the post-IPO paid-up equity capital of the company. From the net proceeds of the IPO funds, it will utilize Rs. 24.13 cr. for capital expenditure, Rs. 11.05 cr. for working capital, and the rest for general corporate purposes. 

After reserving 932000 shares for the market maker, from the rest, the company has allocated not more than 3120000 shares for QIBs, not less than 940000 shares for HNIs, and not less than 2188000 shares for Retail investors. 

The issue is solely lead managed by Narnolia Financial Services Ltd. and Purva Sharegistry (India) Pvt. Ltd. is the registrar of the issue. Share India Securities Ltd. is the market maker for the company. Aksan Capital Advisory Pvt. Ltd. is the advisor to the issue. 

The company has issued entire equity shares at par value so far and has also issued bonus shares in the ratio of 0.1117 for 1 in March 2023, and 35 for 10 in September 2023. The average cost of acquisition of shares by the promoters is Rs. 1.59, and Rs. 1.93 per share. 

Post-IPO, company's current paid-up equity capital of Rs. 17.81 cr. will stand enhanced to Rs. 24.99 cr. Based on the upper cap of the IPO price band, the company is looking for a market cap of Rs. 162.44 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last fiscal, the company has (on a consolidated basis) posted a total revenue/net profit of Rs. 99.91 cr. / Rs 11.08 cr. (FY23).  For 4M of FY24 ended on July 31, 2023, it earned a net profit of Rs. 5.03 cr. on a total revenue of Rs. 39.28 cr. 

On a standalone basis, for the last three fiscals, the company has posted a total revenue.net profit of Rs. 35.47 cr. / Rs. 0.27r. (FY21), Rs. 46.71 cr. / Rs. 0.52 cr. (FY22), and Rs. 77.90 cr. / Rs. 10.82 cr. (FY23). For M4 of FY24 ended on July 31, 2023, it earned a net profit of Rs. 4.93 cr. on a total revenue of Rs. 35.26 cr. Higher other income for FY23 onwards added to its bottom lines. 

The sudden boost in its bottom lines for FY23 onwards raises eyebrows and concern over its sustainability. 

For the last three fiscals, the company (on a standalone basis) reported an average EPS of Rs. 3.01 and an average RoNW of 28.36%. The issue is priced at a P/BV of 1.12 based on its NAV of Rs. 58.07 as of July 31, 2023, and at a P/BV of 3.48 based on its post-IPO NAV of Rs. 18.68 per share at the upper cap.

If we attribute super annualized earnings of FY24 on post-IPO fully diluted paid-up equity capital of the company, then the asking price is at a P/E of 11 on standalone basis and at a P/E of 10.76. The issue appears reasonably priced based on FY24 earnings. 

For the reported periods, the company has (on a standalone basis) posted RoCE margins of 29.50% (FY21), 39.37% (FY22), 83.01% (FY23), and 28.99% (M4-FY24), and PAT margins of 0.75%, 1.11%, 13.89%, 13.97% for the referred periods respectively.  On consolidated basis it posted RoCE of 98.43% (FY23) and 32.40% (M4-FY24) and PAT margins were 11.09% and 12.81%. 

DIVIDEND POLICY:
The company has not declared any dividend for any financial year so far. It will adopt a prudent dividend policy based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per offer document, the company has shown TD Power, Transformers and Recti., Indo Tech Trans., and Voltamp Trans. As their listed peers. They are trading at a P/E of 40.80, 212.75, 19.87, and 26.46 (as of December 19, 2023). However, they are not comparable on an apple-to-apple basis.  

MERCHANT BANKER'S TRACK RECORD:
This is the 6th mandate from Narnolia Financial in the ongoing fiscal. Out of the last 5 listings, all opened at a premiums ranging from 4.35% to 57.07% on the date of listing.