Swasth Foodtech BSE SME IPO review (May apply)

•    The company is engaged in the business of processing rice bran oils and related by-products for marketing.
•    It is operating on a B2B model with bulk supply.
•    The company is operating in a highly competitive and fragmented segment and high-volume low margin business.
•    Based on recent financial performance, the issue appears aggressively priced. 
•    Well-informed investors may park moderate funds for medium to long term. 

ABOUT COMPANY:
Swasth Foodtech Ltd. (SFL) is in the business of processing of rice bran oil from crude oil, for sale to oil manufacturers and packers. It manufactures various rice bran oil under various grades and colours, based on the requirement of customers. The company believes that rice bran oil is healthier than the other options available in the market, on account of it having an ideal balance of polyunsaturated fats and monounsaturated fats, in almost a 1:1 ratio. Since rice bran oil is made from rice bran, it is rich in Vitamin E, an antioxidant and Oryzanol. Rice bran oil is a healthy oil extracted from the germ and inner husk of rice kernels. 

It has gained popularity in recent years due to its numerous health benefits. The advantages of rice bran oil include support heart-healthy; high smoke point makes it a good choice for stir-frying, sauteing, and other high-heat cooking methods; and Neutral flavour makes it a versatile oil that can be used in a variety of dishes. It has crafted business model in such a manner that the company markets and sells, finished products, being rice bran oil, as well as the residue and the by-products generated while processing products. Therefore, SFL markets and sells, fatty acid, gums, spent earth and wax in the open market. The sale of products is majorly made to oil manufacturers, which makes its business model business to business (B2B), wherein the Company processes and/or supplies rice bran oil to reputed manufacturers and packers in tankers. 

The company majorly sells its products in bulk form to players operating with their own brands and to those who sell edible oil in unbranded or loose form. The company also sells products to re-packers who ultimately sell the oil either in their own brands or further sell in bulk form. It believes business model adds value to business operations by ensuring higher capacity utilization and improving the overall production efficiency and costs. As of September 30, 2024, it had 17 employees on its payroll.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden IPO of 1587600 equity shares at a fixed price of Rs. 94 per share to mobilize Rs. 14.92 cr. The issue opens for subscription on February 20, 2025, and will close on February 24, 2025. The minimum number of shares to be applied is for 1200 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. The issue constitutes 27.10% of the post-IPO paid-up capital of the company. The company is spending Rs. 1.92 cr. for the fresh equity issue, and from the net proceeds of the issue, the company will utilize Rs. 3.30 cr. for capex on packaging line for existing manufacturing unit, Rs. 7.50 cr. for working capital, and Rs. 2.20 cr. for general corporate purposes. Higher spending for fresh equity issue indicates funding arrangement and the issue is fully structured.

The IPO is solely lead managed by Horizon Management Pvt. Ltd., MAS Services Ltd., is the registrar to the issue. Giriraj Stock Broking Pvt. Ltd. is the Market Makers for the company. The issue is underwritten to the tune of 84.96% by Giriraj Stock Broking, and 15.04% by Horizon Management. 

The company has issued/converted entire initial equity shares at par value so far. The average cost of acquisition of shares by the promoters is Rs. 10.00 per share. 

Post-IPO, company’s current paid-up equity capital of Rs. 4.27 cr. will stand enhanced to Rs. 5.86 cr. Based on the upper price band of the IPO, the company is looking for a market cap of Rs. 55.06 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has posted a total income/net profit of Rs. 1.23 cr. / Rs. 0.01 cr. (FY22), Rs. 99.94 cr. / Rs. 0.03 cr. (FY23), and Rs. 134.32 cr. / Rs. 1.93 cr. (FY24). For H1 of FY25 ended on September 30, 2024, it earned a net profit of Rs. 1.83 cr. on a total income of Rs. 88.63 cr. The quantum jump in bottom lines from FY24 onwards raises eyebrows and concern over its sustainability. 

For the last three fiscals, the company has reported an average EPS of Rs. 2.55 and an average RoNW of 15.84 %. The issue is priced at a P/BV of 4.97 based on its NAV of Rs. 18.90 as of September 30, 2024, and at a P/BV of 2.39 based on its post-IPO NAV of Rs. 39.26 per share. 

If we attribute FY25 annualized super earnings on post-IPO fully diluted equity capital, then the asking price is at a P/E of 15.04. Based on FY24 earnings, the P/E stands at 28.49. Based on its recent earnings, prima facie, the issue relatively appears aggressively priced. 

For the reported periods, the company has posted PAT margins of 0.93% (FY22), 0.03% (FY23), 1.44% (FY24), 2.07% (H1-FY25), and RoCE margins of 0.22%, 5.11%, 13.48%, 9.79%, for the referred periods, respectively. However, its net debt at 6.71 against EBITDA, and debt equity ratio of 2.92 as of September 30, 2024 raises 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, based on its financial performance and future prospects. 

COMPARISION WITH LISTED PEERS:
As per the offer document, the company has shown Halder Ventures, and Sarveshwar Foods, as their listed peers. They are trading at a P/E of 4.86, and 30.3 (as of February 18, 2025). However, they are not truly comparable on an apple-to-apple basis. This compare appears to be an eyewash.

MERCHANT BANKER’S TRACK RECORD:
This is the 13th mandate from Horizon Management in the last two fiscals.  Out of the last 12 listing, 3 opened at discount, 2 at par and the rest opened with premiums ranging from 8.47% to 141.23% on the date of listing.