Wonder Fibromats NSE SME IPO review (Avoid)

• WFL is in the various types of the fan manufacturing business.

• It does not own any brand, just doing franchise work.

• Many group companies are in a similar business that may pose a conflict of interest.

• Trade payables are almost 63% of its balance sheet of FY19.

• It has longer trade receivable/payable cycles.

ABOUT COMPANY:

Wonder Fibromats Ltd. (WFL) is a fully integrated end-to-end product and solution suite to the original sellers of the fans wherein it provides start to end solutions for fan sellers including sourcing, manufacturing, quality testing and packaging. WFL manufactures and supplies fans to many well-known companies in India, which in turn distribute these products under their own brands.

The company is engaged in the manufacturing of ceiling fans, exhaust, pedestal and brushless DC (BLDC) fans. All the parts & components of the fans are tested stringently at its in-house quality management lab to ensure their flawless performance. Moreover, various R&D activities are conducted by its professionals to remain abreast of the latest market requirements and competition. Apart from this, it has also set up a client-satisfaction cell which is supervised by it's quality check (QC) department that reviews the complaints regarding its products directly from clients.

ISSUE DETAILS/CAPITAL STRUCTURE:

To part finance its expenditure plans for acquisition of land and site development (Rs. 4.4 cr), acquire plant and machinery (Rs. 2.9 cr.), working capital (Rs. 9 cr.) and general corpus fund (Rs. 2.36 cr.) needs, WFL is coming out with a maiden IPO of 2224000 equity shares of Rs. 10 each at a fixed price of Rs. 90 per share to mobilize Rs. 20.02 cr. The issue opens for subscription on 22.07.19 and will close on 24.07.19. Minimum application is to be made for 1600 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. WFL is spending Rs. 1.36 cr. for this IPO proceeds. Issue constitutes 26.55% of the post issue paid-up capital of the company.

So far WFL has issued entire equity at par. It has also issued bonus shares in the ratio of 2 for 1 in August 2018. The average cost of acquisition of shares by the promoters is Rs. 5.10, Rs. 5.12 and Rs. 6.35 per share. Post issue WFL's current paid-up equity capital of Rs. 6.15 cr. will stand enhanced to Rs. 8.38 cr.

The issue is solely lead managed by Navigant Corporate Advisors Ltd. while Karvy Fintech Pvt. Ltd. is the registrar to the issue. Bhaiji Portfolio Ltd. is the market maker for this issue.

MAJOR CONCERNS:

Various group companies are engaged in similar activities and hence going forward conflict of interest for this company is not ruled out. Secondly, it is in the process of registering its trademark logo. Any adversities on this aspect may derail their future plans. WFL's trade payables are nearly 63%of the total balance sheet items and raise concern. The company also has the risk of environmental regulations compliance and stringent labour laws as it runs a labour-intensive business. Its trade receivables and payables have an average period of 3.7 months. For the last three fiscals, it has posted negative cash flows.

FINANCIAL PERFORMANCE:

On the financial performance front, for the last three fiscals, it has posted turnover/net profits of Rs. 165.65 cr. / Rs. 5.09 cr. (FY17), Rs. 294.87 cr. / Rs. 7.97 cr. (FY18) and Rs. 308.02 cr. / Rs. 6.14 cr. (FY19). It has posted a sudden jump in revenue for FY18 and thereafter it is almost static. Its bottom line has shown inconsistency. This is attributed to the fluctuating cost of raw materials.

As per offer documents, for the last three fiscals, it has posted an average EPS of Rs. 22.09 and an average RoNW of 49.93% (it appears for FY17 and FY18 the data is on pre-bonus issue basis and reflects in lucrative earnings data).

The issue is priced at a P/BV of 2.77 on the basis of its NAV of Rs. 32.53 as on 31.03.19 and at a P/BV of 1.88 on the basis of post-issue NAV of Rs. 47.79. If we attribute FY19 earnings on fully diluted post issue equity, then asking price is at a P/E of 12 plus. Thus issue appears fully priced based on earnings stated.

COMPARISION WITH LISTED PEERS:

As per offer documents, WFL is showing Bajaj Electricals and Crompton Greaves Consumers as its listed peers that are currently trading at a P/Es of around 29 and 36 (as on 15.07.19). However, they are not strictly comparable on an apple to apple basis.

MERCHANT BANKER'S TRACK RECORDS:

On Lead Manager's front, this is the 16th mandate from its stable in the last four fiscals. Out of the last 10 listings, 2 opened at discount and the rest with the premiums ranging from 1.25% to 20% on the day of listing.