Associated Coaters BSE SME IPO review (Avoid)

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Review By Dilip Davda on May 28, 2024

•    The company is in the business of powder coating of aluminium extrusions used for real estate industry.
•    IPO expensed of 22.8% raise eyebrows and fully structured nature of the issue.
•    The company posted sudden boost in its financial performances from FY23 onwards.
•    Based on FY24 super annualized earnings, the issue appears fully priced. 
•    Tiny post-IPO equity capital indicates longer gestation for migration to mainboard.
•    There is no harm in skipping this fully priced issue. 

ABOUT COMPANY:
Associated Coaters Ltd. (ACL) is engaged in the business of providing services by way of pre-treatment and powder coating of aluminium extrusions in Architect and Real Estate Industry. The process begins with a comprehensive cleaning, where the targeted surface of aluminium extrusions is thoroughly cleansed of any dirt, grease, or contaminants that might impede the subsequent coating process. Following this, a strategic chemical solution is applied to enhance the adhesion of the powder coating. This involves the application of an acidic solution for surface etching or the use of a specialized pretreatment agent to optimize surface wettability.

The application of powder coating itself is a precision art. Executed with an electrostatic spray gun, this method involves imparting a negative charge to the powder particles. These charged particles are then irresistibly drawn to the positively charged surface, creating a magnetic-like adhesion. The subsequent step involves the melting and fusion of these particles, resulting in a flawlessly even coating.

To fortify the durability of the coating, a carefully calibrated heating process follows. This involves subjecting the coated surface to elevated temperatures, the specifics of which depend on the unique characteristics of the powder coating employed. This curing process not only enhances durability but also ensures a lasting finish. Post-curing, a meticulous inspection is conducted to guarantee uniform application and adherence to specified thickness standards. Any detected defects or imperfections are rectified at this stage, showcasing ACL's unwavering commitment to delivering a flawless product. Only after passing its stringent quality checks does the coated item move to the final stages of packaging and shipment. As of November 30, 2023, it had 15 employees on its payroll.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden IPO of 422000 equity shares of Rs. 10 each at a fixed price of Rs. 121 per share to mobilize Rs. 5.11 cr. The issue opens for subscription on May 30, 2024, and will close on June 03, 2024. The minimum application to be made is for 1000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. The issue constitutes 31.21% of the post-IPO paid-up capital of the company. The company is spending Rs. 1.17 cr. for this IPO process, and from the net proceeds, it will utilize Rs. 1.45 cr. for capex on installation of plant and machinery in existing premises, Rs. 2.00 cr. for working capital, and Rs. 0.49 cr. for general corporate purposes. Thus 22.8% IPO expenses indicates fully structured nature of this IPO with funding arrangements. 

The issue is solely lead managed by Gretex Corporate Services Ltd., and Bigshare Services Pvt. Ltd. is the registrar to the issue. GRETEX group's Gretex Share Broking Ltd. is the market maker for the company. Both LM and MM have under written the issue sharing 50% each.

The company has issued entire equity capital at par so far and has also issued bonus shares in the ratio of 30 for 1 in December 2023. The average cost of acquisition of shares by the promoters is Rs. 0.32 per share. 

Post-IPO, company's current paid-up equity capital of Rs. 0.93 cr. will stand enhanced to Rs. 1.35 cr. Based on the upper IPO price band, the company is looking for a market cap of Rs. 16.36 cr.  Post-IPO small equity base indicates longer gestation period for migration to mainboard. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has posted a total income/net profit/ - (loss) of Rs. NIL / Rs. - (0.01) cr. (FY21), Rs. 1.39 cr. / Rs. 0.14 cr. (FY22), and Rs. 3.59 cr. / Rs. 0.54 cr. (FY23). For 9M of FY24 ended on December 31, 2023, it earned a net profit of Rs. 0.76 cr. on a total income of Rs. 3.97 cr. Boost in bottom lines for 9M-FY24 raise eyebrows and concern over its sustainability going forward.

For the last three fiscals, it has reported an average EPS of Rs. 3.41, and an average RoNW of 14.75%. The issue is priced at a P/BV of 7.98 based on its NAV of Rs. 15.17 as of December 31, 2023, and at a P/BV of 3.06 based on its post-IPO NAV of Rs. 39.58 per share.

If we attribute annualized FY24 super earnings to its post-IPO fully diluted paid-up capital, then the asking price is at a P/E of 16.20, and based on FY23 earnings, the P/E stands at 30.10. Thus the issue appears fully priced. 

For the reported periods, the company has posted PAT margins of NA% (FY21), 9.80% (FY22), 15.13% (FY23), 19.08% (9M-FY24), and RoCE margins of - (5.27) %, 70.66%, 92.11%, 68.30% respectively for the referred periods. 

DIVIDEND POLICY:
The company has not declared any dividends since incorporation. 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 no listed peers to compare with. 

MERCHANT BANKER'S TRACK RECORD:
This is the 23rd mandate from Gretex Corporate in the last four fiscals (including the ongoing one), out of the last 10 listings, 2 opened at discount and the rest with premiums ranging from 18.94% to 187.36% on the date of listing.

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