Aelea Commodities BSE SME IPO review (Apply)

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Review By Dilip Davda on July 10, 2024

•    ACL that was primarily engaged in trading of agri commodities has now focused on Cashew Nut processing and related by products.
•    The company posted inconsistency in its top and bottom lines for the reported periods.
•    2M-FY25 indicates prospects ahead for the company with conversion of waste in income generating by-products.
•    Based on FY25 annualized super earnings, the issue appears reasonably priced.
•    Investors may park funds for the medium to long term rewards.

ABOUT COMPANY:
Aelea Commodities Ltd. (ACL) was incorporate on November 05, 2018 with an object of trading in agriculture products. Initially on inception, it was engaged in Trading of Sugar, Cashew, Pulses and other Commodities product. Thereafter, the company decided to venture into the business of Cashew Processing and setup a processing unit located at Plot No B-47 Survey No. 243, Village Shah, Taluka Mangrol, Surat- 394 421, Gujarat, India. 

ACL specializes in the comprehensive processing and trading of cashews, catering to both the B2B and B2C markets. With a focus on delivering high-quality cashew products, the company engages in selling its premium offerings to customers across diverse locations within India and Internationally. As on date of this Red Herring Prospectus, it has one Subsidiary viz., Supreme Commodities DMCC located at Dubai. As a versatile enterprise, it is deeply entrenched in the processing and trading of cashews, while also actively engaged in the trading of a diverse range of commodities such as Sugar, Pulses, Soybean, Rice, Wheat Flour, and more.

ACL's operational strategy revolves around two distinct models, namely Business to Business (B2B) and Business to Customer (B2C). In the realm of cashews, it has successfully established a presence in both B2B and B2C segments, allowing it to cater to the nuanced requirements of both wholesale clients and individual consumers. On the other hand, its trade in products like Sugar, Pulses, Soybean, Rice, Wheat Flour, etc., is exclusively conducted through B2B channel. This strategic approach enables it to optimize operations, ensuring efficiency and quality service for its business partners, while also delivering top-notch products to valued retail customers. The strategic approach involves not only meeting the demands of the domestic market but also extending its reach to customers outside India. 

Through a commitment to excellence in processing and a customer-centric approach, the company aims to establish itself as a prominent player in the cashew industry, ensuring the satisfaction of its clientele through top-notch products and services. The company engages in importing Raw Cashew Nuts (RCN) from diverse African nations, including Benin, Tanzania, Burkina Faso, Senegal, and Cote d'Ivoire, necessitating substantial quantities and tying up working capital funds. It specializes in trading RCN and Cashew Kernels for consumption. Additionally, it trades in by-products from sugar mills, such as Bagasse.

As on date of this Red Herring Prospectus, Domestically, its majority customers are being situated at Rajasthan, Karnataka, Gujrat, Mumbai, etc. and globally majority customers are being situated at Dubai and Sri Lanka. The company contracts with Multiple International Raw Cashew Nut Trading Companies based out of Singapore, United Kingdom, UAE and Africa. The contracts are entered during the harvesting season basis the competitive pricing being offered by the multiple vendors. Entering into annual supply contracts is not an industry practice as the contracts are entered based on the quality of RCN and the competitive prices being offered during purchase. The shipment of import of raw material is done through sea route.

Traditionally Raw Cashew Nut have been processed to obtain Edible Cashew Kernels which less than 25% by weight of Raw Cashew Nut. The Company has long term focus on extracting better value from the value-added products of the Cashew Nut Shell. The Company plans to start processing the Cashew Nut Shell into Cashew Nut Shell Liquid (CNSL) in phased manner. Expanding the capacity of its existing cashew processing unit and setting up of new processing unit marks a strategic move towards maximizing efficiency and meeting growing market demands.

The proposed plan of venturing into further processing the Cashew Nut Shell into Cashew Nut Shell Liquid (CNSL) presents a lucrative opportunity to extract additional value from its raw materials. CNSL holds immense potential across various industries, including automotive, pharmaceuticals, and chemicals, due to its versatile applications such as in brake linings, varnishes, and insecticides. This diversification not only adds a new revenue stream but also reinforces its commitment to sustainability by minimizing waste and maximizing resource utilization. With this expansion and diversification strategy, ACL is poised to solidify its position as a leader in the cashew processing industry while unlocking new avenues for growth and innovation. As of May 31, 2024, it had 48 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden book building route IPO of 5368800 equity shares of Rs. 10 each to mobilize Rs. 51.00 cr. at the upper cap. It has announced a price band of Rs. 91 - Rs. 95 per share. The issue opens for subscription on July 12, 2024, and will close on July 16, 2024. The minimum application to be made is for 1200 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. The issue constitutes 26.36% of the post-IPO paid-up capital of the company. From the net proceeds of the IPO, it will utilize Rs. 25.53 cr. for setting up of new manufacturing unit and installation of plant and machinery thereon, Rs. 5.92 cr. for purchase of plant and machinery for existing manufacturing unit, and the rest for general corporate purposes. 

The issue is solely lead managed by Ekadrisht Capital Pvt. Ltd., and Maashitla Securities Pvt. Ltd. is the registrar to the issue. SS Corporate Securities Ltd. is the market maker for the company. 

The company has issued entire initial equity shares at par value (based on Rs. 10 FV). It has also issued bonus shares in the ratio of 299 for 1 in March 2024. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. NIL, and Rs. 0.03 per share. 

Post-IPO, company's current paid-up equity capital of Rs. 15.00 cr. will stand enhanced to Rs. 20.37 cr. Based on the upper IPO price band, the company is looking for a market cap of Rs. 193.50 cr.  

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has (on a consolidated basis) posted a total income/net profit of Rs. 105.51 cr. / Rs. 10.63 cr. (FY22), Rs. 110.14 cr. / Rs. 1.91 cr. (FY23), and Rs. 144.51 cr. / Rs. 12.22 cr. (FY24).  For 2M of FY25, it earned a net profit of Rs. 2.80 cr. on a turnover of Rs. 27.58 cr. Thus the company has posted inconsistency in its top and bottom lines for the reported periods. 

For the last three fiscals, it has (on a consolidated basis) reported an average EPS of Rs. 5.68, and an average RoNW of 21.04%. The issue is priced at a P/BV of 2.92 based on its NAV of Rs. 32.50 as of May 31, 2024, and at a P/BV of 1.87 based on its post-IPO NAV of Rs. 50.80 per share (at the upper cap). 

If we attribute annualized FY25 super earnings to its post-IPO fully diluted paid-up capital, then the asking price is at a P/E of 11.50, and based on FY24 earnings, P/E stands at 15.83. Thus the issue appears reasonably priced. 

For the reported periods, the company has posted PAT margins of 10.35% (FY22), 1.76% (FY23), 8.59% (FY24), 10.17% (2M-FY25), and RoCE margins of 28.91%, 11.34%, 31.94%, 5.72% respectively for the referred periods. 

According to the management, with its indigenous guarded technology for converting waste in a bio-fuel product will emerge as the higher earning potentials going forward. With its scale of operation, it is in a better position for maintaining high yield pricing policy. Company's top line has over 98% contribution from B2B business.

DIVIDEND POLICY:
The company has not declared any dividends for the reported periods of the offer document. 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 Krishival Foods, and Prospect Commodities as their listed peers. They are trading at a P/E of 52.9 and 39.3 (as of July 10, 2024). However, they are not comparable on an apple-to-apple basis.

MERCHANT BANKER'S TRACK RECORD:
This is the 3rd mandate from Ekadrisht Capital in the ongoing fiscal. Out of the last 2 listings, all listed with premiums ranging from 110.64% to 225.76% on the date of listing. 

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