Auro Impex NSE SME IPO review (Avoid)

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Review By Dilip Davda on May 8, 2023

•    AICL is in the business of manufacturing and marketing electrodes/plates etc. for air pollution control use. 
•    After the average performance for FY21 & FY22, it posted a miraculous performance for FY23.
•    Non-transparency has been seen in the offer documents that raise major concerns.
•    There is no harm in skipping this pricey IPO.

PREFACE:
Originally, this company planned to open its IPO on 4th May for Anchor and from 5th May to 9th May 23 for all other categories. As the IPO did not mark the opening on May 05, 2023, when asked its LM, they informed over the telecom that the issue timeline is changed to May 10-12, 2023. But now finally it's scheduled from May 11 to May 15, 2023, and there is no Anchor. This kind of gesture goes against both, the company and the Lead Manager. No doubt this is the first mandate from the new Lead Manager of Affinity Global, but that does not grant such behaviour. Even the offer document though declared the price band and the lot size, it missed the dilution percentage and the number of shares on offer data. Even the information on the market maker was missing in the first set of RHP dated May 01, 2023, with a dateline from May 05 -  May 09, 2023. After the follow-up with the lead manager, a few modifications were made. However, with such shaky plans, this issue is finally coming, but then is it not a case of the First impression being the last impression? Should one apply to this IPO as such moves hint at lapses in transparency?  The issue is aggressively priced as it discounts all near-term positives and raises concern over the sustainability of super performance posted for FY23 (a pre-IPO year). The revised RHP was made available only on 08.05.23 late eve which surprisingly expressed higher IPO float size i.e. against shares worth Rs. 24.29 cr. it is now issuing shares worth Rs. 27.07 cr.  

ABOUT COMPANY:
Auro Impex & Chemicals Ltd. (AICL) is an ISO 9001:2015 Certified Company that specializes in the manufacturing of Collecting Electrodes, Discharge Electrode Plate steel structures and other internal components of an Electrostatic Precipitator (ESPs) - a filtration device used to remove smoke and fine dust particles from flowing gas used in various heavy industries such as Steel Plants, Sponge Iron industry, Cement Plants, Thermal Energy Plants and any other plant where the coal is burnt, as a measure to control Air Pollution. 

With the growing demand to minimize air pollution together with the increased awareness amongst the public and the government initiatives to reduce air pollution, in the year 2011, the Company set up a Manufacturing facility for manufacturing Electrostatic precipitator internals for both American and European designs in the state of West Bengal, spread across an area of 2.44 acres of land with all the requisite machines and equipment, with the goal of becoming one of the top producers of ESP Internals (Collecting Electrode, Discharge Electrode, Electromagnetic rapper, Tank Fabrication and Duct Fabrication and ESP Internal spare parts etc.).

Our Company is specifically engaged in manufacturing (i) Collecting Electrodes of all profiles, (ii) Discharge Electrodes, (iii) Electromagnetic rapper, (iv) Tank Fabrication and Duct Fabrication, and (v) other ESP Internal spare parts, for some Original Equipment manufacturers (OEMs) and service providers ranging from sourcing of components, designing, manufacturing, quality testing as per the specifications provided by OEMs and service providers. AICL has created a long-running relationship with clients and has been able to expand its presence in India over the years by manufacturing quality items according to their specifications. The Company has been selling its products through renowned OEMs and Service Providers such as - Thermax Limited, Larsen & Toubro Limited, KC Cottrell India Private Limited, Isgec Heavy Engineering Limited, Hariaksh Industries Private Limited, Par Techno-Heat Pvt. Ltd, Filter Flow Engineering Private Limited, Imeco Overseas Private Limited and other Brand owners.

The company has ventured into a new project to assemble, test, inspect and sell High-Frequency Transformer Rectifier (HFTR) units in the Indian ESP market on behalf of an International brand, with the internal parts and engineering details for assembly and testing supplied by the brand itself. Construction of a new civil building and the procurement of new plant and machinery will take place on the vacant ground of 6,000 Sq.Ft. within the previously established manufacturing facility. For the implementation of this project, AICL already has a sufficient power supply. Its forthcoming initiative is a low-risk enterprise because the processing technology and customer market for the HFTR are easily available. As of March 31, 2023, it had 47 employees on its payroll.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden IPO to mobilize Rs. 27.07 cr. (3470400 shares) at the upper cap of the IPO price. The issue comprises a fresh equity share issue worth Rs. 22.78 cr. (approx. 2920000 shares) and an Offer for Sale (OFS) of 550400 shares (approx. Rs. 4.29 cr. at the upper cap). It has announced a price band of Rs. 74 - Rs. 78 per share and the minimum application to be made is for 1600 shares and in multiples thereon, thereafter. The issue constitutes 28.44% of the post-IPO paid-up capital of the company. The issue opens for subscription on May 11, 2023, and will close on May 15, 2023. Post allotment, shares will be listed on NSE SME Emerge. The company has allocated not more than 10% for QIBs, not less than 33.98% for HNIs, and not less than 56.02% for Retail investors from the proposed IPO excluding the market maker portion (5.03%). 

From the net proceeds of the fresh issue, the company will utilize Rs. 15.08 cr. for working capital and the rest for general corporate purposes. 

This is the first mandate from a new Lead Manager Affinity Global Capital Market Pvt. Ltd. and Cameo Corporate Services Ltd. is the registrar of the issue. Rikhav Securities Ltd. is the market maker for the company. MM's name got included in the revised RHP dated 06.05.23 in a single line, missing info on its whereabouts and the contact person.

The company has issued the entire equity capital at par so far and has also issued bonus shares in the ratio of 11 for 1 in January 2023. The average cost of acquisition of shares by the promoters is Rs. 0.70, and Rs. 4.91 per share. 

Post-IPO AICL's current paid-up equity capital of Rs. 9.28 cr. will stand enhanced to Rs. 12.20 cr. Based on the upper cap of the IPO price, the company is looking for a market cap of Rs. 95.17 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last two fiscals, AICL has (on a consolidated basis) posted a turnover/net profit of Rs. 151.85 cr. / Rs. 2.30 cr. (FY22), and Rs. 232.97 cr. / Rs. 6.00 cr. (FY23). The sudden boost in its bottom line in a pre-IPO year raises eyebrows and concern over sustainability. 

On a standalone basis, for the last three fiscals, the company has posted a turnover/net profit of Rs. 73.73 cr. / Rs. 0.91 cr. (FY21), Rs. 110.78 cr. / Rs. 2.05 cr. (FY22), and Rs. 181.69 cr. / Rs. 5.57 cr. (FY23). 

While the company has not shown average EPS and RoNW on the basis of consolidated performance as it is only for two years, on a standalone basis the company has reported an average EPS of Rs. 3.90 and an average RoNW of 35.13%. The issue is priced at a P/BV of 4.12 based on its NAV (on a consolidated basis) of Rs. 18.91. The offer document and the IPO ad is missing post-IPO NAV data. In fact, the revised RHP shows post-IPO NAV of Rs. 74 - Rs. 78 at the lower and upper cap. (See page no. 84 of the offer document). 

If we attribute FY23 super earnings to post-IPO fully diluted equity capital, then the asking price is at a P/E of 15.85, while on the basis of its FY22 performance, P/E stands at 41.27. Thus the issue appears aggressively priced. 

DIVIDEND POLICY:
The company has not declared any dividends for the reported periods of the offer document. 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 first mandate from Affinity Global and has no track record.

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