IPO Size: Rs. 66 cr - Entirely fresh issue
- Rs. 20 cr debt repayment (includes Rs.18 cr repayment of loan to promoter company and promoter company’s shareholder)
- Rs. 15 cr working capital
- Rs. 8 cr to part-fund capex
Price band: Rs. 61-65 per share
M cap: Rs. 168 cr, implying 40% dilution
- 75% allocation to QIBs and only 10% retail
IPO Date: Fri 30th Dec to Wed 4th Jan 2023, Listing: Thu 12th Jan 2023
Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.
Udaipur based Packaging Material Maker
92% subsidiary of listed Sat Industries Limited, Sah Polymers manufactures HDPE/PP woven sacks and FIBC products used for packaging by cement, fertilizer, pharma and food sector. Since utilisation of current capacity of 3,960 MTPA is nearly 88%, it is doubling capacity by FY23-end, through a Rs. 34 cr capex, funded via Rs. 26 cr loan (to be partly repaid via IPO), effectively funding majority capex from IPO proceeds.
Small Size of Operations
Such small is size of operations that average operating profit of last 3 fiscals is below Rs. 15 cr. Hence only 10% of issue is reserved for retail investors (which is 35% otherwise), as per SEBI guidelines.
Company’s FY22 revenue stood at Rs. 81 cr, with nearly equal mix of domestic and export sales. PAT of Rs. 4.4 cr, translated into an EPS of Rs. 2.8, on an equity of Rs. 15.6 cr (FV Rs. 10). Q1FY23 reported revenue of Rs. 27 cr, with PAT of Rs. 1.3 cr and EPS of 80 paise.
Mid-Single Digit Margins
Company’s operations are B2B and hence margins slim – net margin ~5%. For most raw materials, company is a price taker. On the selling side, it lacks pricing power given intense competition. Thus, scope of margin expansion is negligible. Loan repayment will also not expand net margin, as interest cost is being capitalised and not impacting P&L currently.
Pre-covid, company’s net margins were below 1% (for FY19 and FY20) which rose to 5.4% in FY22, before contracting to 4.6% in Q1FY23.
Listed FIBC maker Kanpur Plastipack, with Rs. 600 cr revenue and similar RoE of 16% as Sah’s, is ruling at a PE multiple of 8x, while Emmbi Industries with over Rs. 400 cr topline also ruling at a PE of 8x. Sah Polymers IPO is priced at a PE multiple of 20x, based on Q1FY23 annualised EPS. Annualising Q1FY23 earnings may not be appropriate, as all the listed peers have reported sequential drop in net profit in Q2FY23.
Even if one factors in new capacity and expanded equity of Sah Polymers, PE multiple works out to 14.7x, on FY24E basis, which is highly aggressive, and company doesn’t deserve more than a lower single digit PE multiple.