VELS Film NSE SME IPO review (Avoid)

•    VFIL is in the business of film production and the sale of film rights. 
•    It has posted inconstancy in its financial performances so far. 
•    Based on its FY23 earnings, the issue appears exorbitantly priced. 
•    There is no harm in skipping this "High-Risk/ Low-return" bet. 

ABOUT COMPANY:
VELS Film International Ltd. (VFIL) is primarily in the business of the production of films and the sale of film rights. The company is a member of the South Indian Film Chamber of Commerce. The company's contribution to the South Indian Film Industry is growing at a fast pace, particularly in the Tamil Film Industry which is the third biggest in India. 

After successfully setting up various schools, medical colleges and universities in the year 2016 the promoter drifted his attention to film production in the Tamil film industry in memory of his actor father. The promoter associated himself with Mr Prabhu Deva, known for his choreography, and alongside him co-produced the film 'Devi' in 2016 along with other films. Later in 2019, 'LKG' was produced by M/s VELS Film International (sole proprietorship concern of the promoter). After producing a few more films, it decided to corporatize its film production business and therefore formed VELS Film International Limited.

VFIL has lined up six film projects under its fold and all are set to release in fiscal 2023-24. As of January 31, 2023, it has 12 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden IPO of 3408000 equity shares of Rs. 10 each at a fixed price of Rs. 99 per share to mobilize Rs. 33.74 cr. The issue opens for subscription on March 10, 2023, and will close on March 14, 2023. The minimum application to be made is for 1200 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 26.40% of the post-IPO paid-up equity capital of the company. VFIL is spending Rs. 0.60 cr. for this IPO process and from the net proceedings, it will utilize Rs. 28.00 cr. for film production, and Rs. 5.14 cr. for general corporate purposes.

Khambatta Securities Ltd. is the sole lead manager and Cameo Corporate Services Ltd. is the registrar of the issue. SS Corporate Securities Ltd. is the market maker for the company. 

So far, the company has issued/converted the entire equity capital at par value. The average cost of acquisition of shares by the promoters is Rs. 10 per share. 

Post-IPO, VFIL's current paid-up equity capital of Rs. 9.50 cr. (9500000 shares) will stand enhanced to Rs. 12.91 cr. (12908000 shares). Based on the IPO pricing, the company is looking for a market cap of Rs. 127.79 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, VFIL has (on a standalone basis) posted a turnover/net profit - Loss of Rs. NIL / Rs. - (0.01) cr. (FY20), Rs. 26.01 cr. / Rs. 5.93 cr. (FY21), and Rs. 27.36 cr. / Rs. 4.69 cr. (FY22). For H1 of FY23 ended on September 30, 2022, it earned a net profit of Rs. 3.00 cr. on a turnover of Rs. 45.61 cr.

On a consolidated basis, for FY22, VFIL has posted a turnover of Rs. 27.18 cr. with a net profit of Rs. 3.25 cr. and for H1 of FY23 it reported a net profit of Rs. 1.09 cr. on a turnover of Rs. 47.19 cr. Here too, it has posted inconsistency in its top and bottom lines.  

For the last three fiscals, it has posted an average EPS of Rs. 30.08 and an average RoNW of 21.93%. (These are on the basis of its paid-up equity capital as of March 31, 2022). The issue is priced at a P/BV of 5.01 based on its NAV of Rs. 19.78 as of March 31, 2022 (the offer document has no data for its NAV as of September 30, 2022), and at a P/BV of 2.37 based on its post-IPO NAV of Rs. 41.74 per share. (Thus there is a suppression of facts and figures in the offer document). 

If we annualize FY23 earnings and attribute it to post-IPO fully diluted paid-up equity capital, the asking price is at a P/E of around 58.58 indicating exorbitant pricing of the IPO. 

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

COMPARISON WITH LISTED PEERS:
As per the offer document, the company has no listed peers to compare with. 

MERCHANT BANKER'S TRACK RECORD:
This is the 3rd mandate from Khambatta Securities in the last three fiscals (including the ongoing one). Out of the last 2 listings, all were listed at premiums ranging from 0.61% to 16.67% on the listing date.