Varyaa Creation BSE SME IPO review (Avoid)

•    The company is engaged in trading activities of gold/silver/precious/semi-precious stones.
•    The company depends on third party contracts and does not have its own manufacturing.
•    The boost in bottom lines 9M-FY24 appears to be fabricated to get fancy valuations.
•    The company operates in highly competitive and fragmented segment.
•    There is no harm in skipping this "High Risk/Low Return" bet. 

ABOUT COMPANY:
Varyaa Creations Ltd. (VCL) is engaged in the business of wholesale trading of gold, silver, precious stone, semi-precious stone. Apart from the above, from this financial year onwards, the company also intends to focus on manufacturing and selling of jewellery 's. It manufactures its jewellery through job worker located in Mumbai. Since VCL is a trading company, it does not own any major plant and machinery. 

Historically, the company has earned its revenues from wholesale trading of gold, silver, precious stone, semi-precious stone and from sales of jewellery. Currently, its products are sold only through the offline market, i.e. from its registered office located in Mumbai. Its customers can also make inquiry through online platform www.varyaacreations.com. Further, the company will also be selling its products through its own online platform, i.e. www.baubleberry.com. This online platform will facilitate and provide its customers with an experience of Phygital marketing (physical plus digital-a blend of digital experiences with physical marketing), i.e., an option to browse variety of jewellery through its catalogue. In coming few years, the company shall be earning its revenues not only from bullion trading but also by selling products through offline market and online market.

The major raw material used for making products is gold, precious stones, gemstones, semi-precious stone, silver etc. which is further provided to the job worker who manufacture the jewellery for VCL. The job worker manufactures products as per design and pattern provide by it. Designing of products are done in-house. The company has not entered into any formal contract or agreement with the job worker. It procures gold, silver, gemstones, precious and semi-precious stones majorly through the bullion market and jewellery market dealers located in Mumbai. Its jewellery is widely sold through B2B and B2C platform. The company also sells customized jewellery to customers. It offers jewellery across different price points so as to maximize its potential customer base. 

VCL's product portfolio includes Necklace, Earring, Tops, Ring, Bracelet, Bangles, Gemstones, Diamonds, Lab Grown diamonds, Pearls and it also make customized jewelleries as per customer's needs. As of March 31, 2024, it had 8 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden IPO of 1340000 equity shares of Rs. 10 each at a fixed price of Rs. 150 per share to mobilize Rs. 20.10 cr. The issue opens for subscription on April 22, 2024, and will close on April 25, 2024. The minimum application to be made is for 1000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. The issue constitutes 27.97% of the post-IPO paid-up capital of the company. The company is spending Rs. 0.60 cr. for this IPO process and from the net proceeds of the IPO, it will utilize Rs. 5.50 cr. for establishing new showroom, Rs. 10.00 cr. for purchase of inventory, and Rs. 4.00 cr. for general corporate purposes.

The company could have opted for a market lot of 800 shares which could have helped them in higher tally of stakeholders post-IPO.

The issue is solely lead managed by Inventure Merchant Banker Services Pvt. Ltd., and Bigshare Services Pvt. Ltd. is the registrar of the issue. SVCM Securities Pvt. Ltd. is the market maker for the company. While Inventure has underwritten the issue to the tune of 15%, and SVCM has underwritten up to 85%.

The company has issued entire equity capital at par value so far and has also issued bonus shares in the ratio of 22 for 1 in September 2023. The average cost of acquisition of shares by the promoters is Rs. 0.43 per share. 

Post-IPO, company's current paid-up equity capital of Rs. 3.45 cr. will stand enhanced to Rs. 4.79 cr. Based on the upper IPO price band, the company is looking for a market cap of Rs. 71.85 cr.  

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has posted a total income/net profit/ - (loss) of Rs. 0.12 cr. / Rs. - (0.13) cr. (FY21), Rs. 2.53 cr. / Rs. 0.58 cr. (FY22), Rs. 5.38 cr. / Rs. 0.79 cr. (FY23). The company posted the sudden boost in its top and bottom lines for 9M of FY24. For the 9M period ended on December 31, 2023, it earned a net profit of Rs. 3.51 cr. on a total income of Rs. 17.63 cr. This bumper numbers appears to be window dressing for fancy valuation for the IPO. Sustainability of such margins going forward in a highly competitive segment remains major concern.

For the last three fiscals, it has reported an average EPS of Rs. 37.75, and an average RONW of - (30.07) %. The issue is priced at a P/BV of 12.61 based on its NAV of Rs. 11.90 as of December 31, 2023, and at a P/BV of 2.97 based on its post-IPO NAV of Rs. 50.53 per share. 

The average EPS data is based on pre-bonus equity and the offer document is missing post-bonus average EPS data. 

If we attribute annualized FY24 earnings to its post-IPO fully diluted paid-up capital, then the asking price is at a P/E of 15.35. Based on FY23 earnings, the P/E stands at 90.91. Based on its recent financial performance, the issue appears fully priced. 

For the reported periods, the company has posted PAT margins of - (108.37) % (FY21), 22.91% (FY22), 14.67% (FY23), 19.92% (9M-FY24), and RoCE margins of - (1.24) %, 267.65%, 190.12%, 114.57% 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 PNGS Gargi, and Ashapuri Gold as their listed peers. They are trading at a P/E of 71.5 and 48.1 (as of April 18, 2024). However, they are not comparable on an apple-to-apple basis.

MERCHANT BANKER'S TRACK RECORD:
This is the 10th mandate from Inventure Merchant in the last four fiscals (including the ongoing one), out of the last 8 listings, 3 opened at discount, 2 at par and the rest with premiums ranging from 0.45% to 57.14% on the date of listing. Thus the LM has poor track record.