Vaxtex Cotfab NSE SME IPO review (Avoid)

•    VCL was in trading of cotton fabrics and has recently added job work processing.
•    Plans to process own fabrics based on growth in demand.
•    A sudden spurt in the bottom line for Q1 raises concern.  
•    LM has a poor track record.

 ABOUT COMPANY:
Vaxtex Cotfab Ltd. (VCL) that started a cotton fabrics trading business at Kolkata has shifted its operations to Gujarat and is now also engaged in processing of fabrics at the rented plant. It currently does job work for third party products. It plans to gradually shift to own fabrics processing going forward based on growth in demand. Revenue from job work has the lion share in its top line.

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its needs for acquiring machinery (Rs. 0.59 cr.), working capital (Rs. 2.50 cr.) and general corpus fund (Rs. 0.44 cr.) VCL is coming out with a maiden IPO of 1596000 equity shares of Rs. 10 each at a fixed price of Rs. 24 per share to mobilize Rs. 3.83 cr. The issue opens for subscription on 27.12.19 and will close on 03.01.20. The minimum application is to be made for 6000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 26.5% of the post issue paid-up capital of the company. VCL is spending Rs. 0.30 cr. for the entire proceeds of this IPO.

The issue is solely lead managed by Capitalsquare Advisors Pvt. Ltd. and Bigshare Services Pvt. Ltd. is the registrar to the issue. NNM Securities Pvt. Ltd. is the market maker for this issue.

Having issued initial equity at par value, VCL raised further equity for Rs. 100 per share in March 2006 and had issued bonus shares in the ratio of 10 shares for every 1 share held in April 2019. The average cost of acquisition of shares by the promoters is Rs. 0.09 and Rs. 0.91 per share. Post issue, VCL's paid-up capital will stand enhanced from Rs. 4.43 cr. to Rs. 6.02 cr. Thus the company mulls market capitalization of Rs. 14.46 cr.

FINANCIAL PERFORMANCE:
For the last three fiscals, VCL has posted turnover/net profits of Rs. 4.46 cr. / Rs. 0.02 cr. (FY17), Rs. 18.47 cr. / Rs. 0.17 cr. (FY18) and Rs. 22.02 cr. / Rs. 0.60 cr. (FY19). For Q1 of FY20, it has clocked in the net profit of Rs. 0.34 cr. on a turnover of Rs. 4.54 cr. A sudden spurt in the bottom line for Q1 raises concern. For the last three fiscals, VCL has posted an average EPS of Rs. 0.78 and an average RoNW of 7.82%. The issue is priced at a P/BV of 2.10 based on its NAV of Rs. 11.44 as on 30.06.19 (as per restated financial data) and at a P/BV of 1.63 based on post-IPO NAV of Rs. 14.76. VCL has not paid any dividends so far.

If we annualize FY20 Q1 super earnings and attribute it to post issue paid-up equity capital then asking price is at a P/E of 10.6.

VCL's holding periods for inventors is expected to rise from the current 36 days to 54 days and trade receivables from 61 days to 98 days. This is set to impact its working going forward.  Company's current debt/equity ratio of 1.78 will decline to 1.01 post this issue.

COMPARISION WITH LISTED PEERS:
As per offer documents, VCL has shown Kavita Fabrics, SKS Textiles and Jakharia Fabrics as its listed peers. They are currently trading at a P/E of 391, 5.64 and 21.15 (as on 23.12.19). However, they are not strictly comparable.

MERCHANT BANKER'S TRACK RECORD:
On merchant banker's front, this is the 2nd mandate from its stable in the current fiscal. The only listing that took place so far was opened at a discount (-1.16%) to offer price on the day of listing.  Currently, it trades at a discount of around 30%.