United Heat NSE SME IPO review (May apply)

•    The company is in the business of various types of industrial/automotive heat exchangers manufacturing and marketing.
•    While it marked inconsistency in its top lines for the reported periods, quantum jump in bottom lines from FY24 onwards remains concern.
•    Based on FY25 annualized super earnings, the issue appears fully priced. 
•    It is operating in a highly competitive and fragmented segment.
•    Well-informed investors may park moderate funds for long term.

ABOUT COMPANY:
United Heat Transfer Ltd. (UHTL) is engaged in the manufacture of a range of shell and tube heat exchangers, air cooled heat exchangers, pressure vessels and process flow skids equipment's which are used as critical equipment's for petrol and diesel engines, railway engines, maritime engines, cruse and cargo ships, ferries, pleasure boats, marine diesels, mining trucks, mega yachts, heavy engines, fishing boats, heavy trucks, freighters, trawlers, heavy haulages, power gen sets, super tankers, off highway engines etc. since 1995.

The company extends its expertise with the growing national and multinational OEM industry for Heat Exchangers, Moisture Separators Pressure Vessels and Process Flow Skids. It manufactures heat transfer equipment's as per the TEMA (Tubular Exchanger Manufacturers Association) standards, ASME Section VIII Div. 1, Div. 2, (unfired pressure vessels), API 660, 661, NES standards. Its strength lies in the excellent quality and craftsmanship of products, the engineering expertise of its team, and continuous pursuit of developing technologically innovative products. As of July 31, 2024, it had 105 employees on its payroll.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden book building route IPO of 5084000 equity shares of Rs. 10 each to mobilize Rs. 30.00 cr. (at the upper cap). The company has announced a price band of Rs. 56 - Rs. 59 per share. The issue opens for subscription on October 22, 2024, and will close on October 24, 2024. The minimum number of shares to be applied is for 2000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 26.75% of the post-IPO paid-up capital of the company. From the net proceeds of the IPO, the company will utilize Rs. 5.73 cr. for repayment of certain debts, Rs. 14.00 cr. for working capital, and the rest for general corporate purposes. 

The IPO is solely lead managed by Swastika Investmart Ltd., and Link Intime India Pvt. Ltd. is the registrar to the issue. Swastika Investmart Ltd., is also the Market Maker for the company. 

Having issued initial equity shares at par value, the company issued further equity shares at a fixed price of Rs. 50 in June 2024. It has also issued bonus shares in the ratio of 1 for 1 in November 2025, and 2 for 1 in March 2024. The average cost of acquisition of shares by the promoters is Rs. 1.67, Rs. 1.80, Rs. 1.84, and Rs. 16.67 per share. 

Post-IPO, company's current paid-up equity capital of Rs. 13.92 cr. will stand enhanced to Rs. 19.00 cr. Based on the upper price band of the IPO, the company is looking for a market cap of Rs. 112.12 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has posted a total income/net profit of Rs. 47.96 cr. / Rs. 1.53 cr. (FY22), Rs. 70.40 cr. / Rs. 2.12 cr. (FY23), and Rs. 64.10 cr. / Rs. 6.24 cr. (FY24). For 4M of FY25 ended on July 31, 2024, it earned a net profit of Rs. 2.43 cr. on a total income of Rs. 21.20 cr. While it posted inconsistency in its top lines for the reported periods, the surge in bottom line for FY24 onwards raises eyebrows and concern over its sustainability. 

For the last three fiscals, the company has reported an average EPS of Rs. 3.20 and an average RoNW of 22.41%. The issue is priced at a P/BV of 2.87 based on its NAV of Rs. 20.58 as of July 31, 2024, and at a P/BV of 1.91 based on its post-IPO NAV of Rs. 30.86 per share (at the upper cap). 

If we attribute FY25 annualized super earnings on post-IPO fully diluted equity capital, then the asking price is at a P/E of 15.40, and based on FY24 earnings, the P/E stands at 17.99. The issue relatively appears fully priced.

For the reported periods, the company has posted PAT margins of 3.20% (FY22), 3.02 % (FY23), 10.36% (FY24), 11.44% (4M-FY25), but the RoCE margins data is missing in RHP. 

DIVIDEND POLICY:
The company has not paid any dividends for the reported periods of the offer document. It has adopted a dividend policy in July 2024, based on its financial performance and future prospects. 

COMPARISION WITH LISTED PEERS:
As per the offer document, the company has shown Patels Airtemp, and The Anup Engg., as their listed peers. It is trading at a P/E of 30.4, and 49.6 (as of October 18, 2024). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
This is the 13th mandate from Swastika Investmart in the last three fiscals (including the ongoing one).  Out of the last 10 listings, 1 opened at discount, 1 at par, and the rest opened with a premiums ranging from 4.82% to 110.64% on the date of listing.