United Cotfab BSE SME IPO review (May apply)

•    UCL, a trader in textiles has ventured into manufacturing of cotton yarn since April 2023.
•    Boosted top and bottom line for one full year of FY24 raise eyebrows and concern over sustainability of margins.
•    The company is operating in a highly competitive and fragment segment.
•    Based on FY24 super earnings, the issue appears fully priced. 
•    Well-informed/cash surplus investors may park moderate funds for the long term. 

ABOUT COMPANY:
United Cotfab Ltd. (UCL) is engaged in the manufacturing of high quality open end yarn catering to the textile industry. Its manufacturing process adheres to stringent quality standards and is backed by advanced technology and machinery. UCL follows a systematic approach that includes raw material selection, blending (if required), spinning, winding, and quality control.

During the Financial Year 2020-23, the company was in the process acquisition of land admeasuring area of 7264 sq mtrs located at Village Timba, Taluka Daskroi, Ahmedabad, for setting up Manufacturing facility having an installed capacity of approx. 9125 (MT) per annum. Its manufacturing facility is close to the rich cotton growing areas of Saurashtra region of Gujarat and Maharashtra. It commenced the production of cotton yarn in April 2023. Its manufacturing facility is equipped with modern and automatic plant and machinery. The level of advancement determines the productivity of machines and labor, which in turn, determines the production and profitability of the Company. Technology is a crucial aspect of the cotton yarn industry.

UCL is committed to sustainable manufacturing practices and environmental responsibility. Its processes are designed to minimize waste, conserve energy and reduce the environmental impact. The company has built strong relationship with a diverse range of clients, including textile manufacturers, garment exporters and distributors. During FY 2022-23, the company was engaged in the business of trading of cotton yarn. In April 2023, it commenced the manufacturing of open ended cotton yarn. Cotton yarn is a type of yarn that is made from cotton fibres. Cotton yarn comes in various thicknesses, known as yarn weights, which determine its suitability for different products. Common yarn weights include lace, fingering, sport, worsted, and bulky, each with its own characteristics and recommended uses. It is widely used in the textile industry for various applications, including knitting, weaving, and crocheting. Cotton yarn is known for its softness, breathability, and versatility, making it a popular choice for clothing, home textiles, and other fabric-based products. As of March 31, 2024, it had 118 employees on its payroll.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden IPO of 5184000 equity shares of Rs. 10 each at a fixed price of Rs. 70 per share to mobilize Rs. 36.29 cr. The issue opens for subscription on June 13, 2024, and will close on June 19, 2024. The minimum application to be made is for 2000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. The issue constitutes 30.16% of the post-IPO paid-up capital of the company. The company is spending Rs. 2.73 cr. for this IPO process, and from the net proceeds, it will utilize Rs. 24.70 cr. for working capital, and Rs. 8.86 cr. for general corporate purposes. 

The issue is solely lead managed by Beeline Capital Advisors Pvt. Ltd., and Purva Sharegistry (India) Pvt. Ltd., is the registrar to the issue. Beeline Group's Spread X Securities Pvt. Ltd. is the market maker for the company. 

The company has issued initial equity capital at par and further equity shares at a fixed price of Rs. 70 per share in November 2023. It has also issued bonus shares in the ratio of 149 for 25 in December 2023. The average cost of acquisition of shares by the promoters is Rs. 10.01 per share. 

Post-IPO, company's current paid-up equity capital of Rs. 12.01 cr. will stand enhanced to Rs. 17.19 cr. Based on the upper IPO price band, the company is looking for a market cap of Rs. 120.33 cr.  

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has posted a total income/net profit of Rs. 0.02 cr. / Rs. 0.02 cr. (FY22), Rs. 0.64 cr. / Rs. 0.14 cr. (FY23), and Rs. 115.53 cr. / Rs. 8.67 cr. (FY24). The sudden boost in its top and bottom lines in pre-IPO year i.e. FY24 raises eyebrows and concern over the sustainability of margins going forward, as it is operating in a highly competitive and fragmented segment. 

Wild fluctuation in the prime raw material price, i.e. cotton, plays an important role in companies like this. It is highly dependent on the government policies as well. 

For the last three fiscals, it has reported an average EPS of Rs. 2.71, and an average RoNW of 32.45%. The issue is priced at a P/BV of 6.20 based on its NAV of Rs. 11.30 as of March 31, 2024, and at a P/BV of 2.41 based on its post-IPO NAV of Rs. 29.00 per share.

If we attribute annualized FY24 super earnings to its post-IPO fully diluted paid-up capital, then the asking price is at a P/E of 13.89. Thus the issue is fully priced discounting all near term positives. 

For the reported periods, the company has posted PAT margins of NIL% (FY21), NIL% (FY22), 31.51% (FY23), 7.52% (FY24), and RoCE margins of - (0.11) %, - (0.04) %, 0.04%, 26.95% respectively for the referred periods. 

DIVIDEND POLICY:
The company has not declared any dividends since incorporation. It will adopt a prudent dividend policy based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per the offer document, the company has shown Lagnam Spintex, PBM Poly, and Vippy Spinpro as their listed peers. They are trading at a P/E of 16.5, NA, and 23.1 (as of June 07, 2024). However, they are not comparable on an apple-to-apple basis.

MERCHANT BANKER'S TRACK RECORD:
This is the 41st mandate from Beeline Capital in the last three fiscals (including the ongoing one), out of the last 10 listings, all opened at a premiums ranging from 5.88% to 386.67% on the date of listing.