Unilex Colours NSE SME IPO review (May apply)

•    The company manufactures pigments and trades in chemicals and food colours.
•    It marked inconsistency in its financial performance for the reported periods, but posted boosted profits for FY24.
•    The company is operating in a highly competitive and fragmented segment.
•    Based on FY24 earnings, the issue appears fully priced. 
•    Well-informed investors may park moderate funds for medium term. 

ABOUT COMPANY:
Unilex Colours & Chemicals Ltd. (UCCL) is engaged in the business of manufacturing of Pigment, and the trading of chemicals and food colours. The pigments manufactured by it find diverse applications across various industries such as plastic, rubber, textiles, paper, printing inks, paints and coating. Within Pigments, it specializes in Pigment Blue 15:3 and 15:4, with an annual production capacity of 1878 mtpa. Its products are marketed under the registered brand name "Unilex." 

The company caters to both domestic and international markets, providing a wide range of pigment solutions for various industries. Its manufacturing facility holds ISO 9001:2015 certification for quality management in the manufacturing of pigments, food dyes, and drug intermediates. Furthermore, it has been recognized as a Three Star Export House by the Ministry of Commerce, Government of India. To ensure global product compliance (Europe) AB Sweden, the company has received a Certificate of REACH Registration, issued under the REACH Regulation (Registration, Evaluation, Authorisation, and Restriction of Chemicals), a regulation of the European Union (EU). 

Its laboratories allow for thorough experimentation, analysis and optimization of processes, as well as testing and refinement of product applications. Its dedicated engineers constantly keep abreast of the latest technology and trends as industry requirements. 

UCCL trades various pigments and food colours such as Pigment Green 7, Middle Chrome, Lemon Chrome, Pigment Violet 3, 23, and 27, Ultramarine Blue, and other Azo pigments like Red 57:1, 53:1, Orange 5, 13, and Yellow 12, 13, 14 as well as food colours such as Tartrazine, Sunset Yellow, Allura Red, Ponceau 4R, Carmoisine, and Brilliant Blue etc., which are sourced from third-party manufacturers to meet clients' specific needs and standards. While it produces and sells a comprehensive range of pigments, the company has noticed that some customers have needs that extend beyond its in-house offerings. To address these needs and ensure complete customer satisfaction, it sources a wide range of pigments from other manufacturers. 

This approach allows UCCL to provide a broad spectrum of high-quality pigments, ensuring that it can fully cater to the unique and varied demands of clientele. The company ensures high quality by working closely with manufacturers and conducting thorough quality checks, meeting industry standards and serving clients in various sectors such as automotive, textiles, plastics, and consumer goods.

It is exporting products to countries including Vietnam, Brazil, Mexico, Nigeria, Russia, Turkey, Netherlands, Poland, China, Spain, Malaysia, Thailand, United Arab Emirates and Uzbekistan. As of March 31, 2024, it had 54 employees on its payroll.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden book building route IPO of 3600000 equity shares of Rs. 10 each to mobilize Rs. 31.32 cr. (at the upper cap). It has announced a price band of Rs. 82 - Rs. 87 per share. The issue opens for subscription on September 25, 2024, and will close on September 27, 2024. The minimum application to be made is for 1600 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 26.44% of the post-IPO paid-up capital of the company. From the net proceeds of the fresh equity issue, the company will utilize Rs. 15.00 cr. for working capital, Rs. 10.00 cr. for repayment/prepayment of certain borrowings, and the rest for general corporate purposes.

The issue is solely lead managed by Hem Services Ltd., Link Intime India Pvt. Ltd. Is the registrar to the issue, while Hem Group's Hem Finlease Pvt. Ltd. Is the market maker.

Having issued initial equity shares at par so far, the company issued further equity shares at a fixed price of Rs. 20 per share in March 2007 and August 2007. It has also issued bonus shares in the ratio of 2 for 1 in March 2024. The average cost of acquisition of shares by the promoters is Rs. 0.00, Rs. 3.11, and Rs. 33.64 per share. 

Post-IPO, company's current paid-up equity capital of Rs. 10.02 cr. will stand enhanced to Rs. 13.62 cr. Based on the upper cap of IPO price band, the company is looking for a market cap of Rs. 118.47 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has posted a total income/net profit of Rs. 151.57 cr. / Rs. 4.71 cr. (FY22), Rs.  144.42 cr. / Rs. 4.97 cr.  (FY23), Rs. 149.33 cr. / Rs. 6.17 cr. (FY24). While it posted inconsistency in its top lines for the reported periods, boosted profits for FY24 raises eyebrows. 

For the last three fiscals, it has reported an average EPS of Rs. 5.52 and an average RoNW of 16.34%. The issue is priced at a P/BV of 2.36 based on its NAV of Rs. 36.80 as of March 31, 2024, and at a P/BV of 1.74 based on its post-IPO NAV of Rs. 50.07 per share (at the upper cap).

If we attribute FY24 super earnings to its post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 19.21. Based on FY23 earnings, the P/E stands at 23.84. Thus the issue relatively appears fully priced. 

The company reported PAT margins of 3.24% (FY22), 3.57% (FY23), 4.29% (FY24), and RoE margins of 17.98 %, 16.54%, 17.90% for the referred periods, respectively.

DIVIDEND POLICY:
The company has declared of 30% (FY22). 40% (FY23), and 30% (FY24). 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 Kesar Petro, and Sudarshan Chemical, as their listed peers. They are trading at a P/E of 25.9, and 59.0 (as of September 20, 2024). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
This is the 56th mandate from Hem Securities in the last three fiscals (including the ongoing one). Out of the last 10 listings, all listed with a premium ranging from 18.18% to 90% on the date of listing.