Baba Food NSE SME IPO review (May apply)

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Review By Dilip Davda on October 30, 2023

•    BFPL is primarily engaged in the business of flour of various products.  
•    The company is selling its products under "Panchakanya" and "Bhajan" brands.
•    The company has posted incremental growth in its bottom lines for the reported periods.
•    Based on annualized FY24 earnings, the issue appears fully priced. 
•    Well-informed investors may park moderate funds for the medium to long-term rewards.

ABOUT COMPANY:
Baba Food Processing (India) Ltd. (BFPL) is primarily engaged in the business of manufacturing high fibre Whole Wheat Atta (Wheat Flour), Refined Flour (Maida), Tandoori Atta and Semolina flour (Sooji). Its manufacturing unit is situated in Ranchi and houses two divisions namely, high fibre whole wheat atta division and refined flour division. 

It also commercializes the by-product and waste material, i.e., wheat bran and other waste materials generated during manufacturing process as cattle feed and fish feed, which makes its manufacturing unit a zero waste and zero discharge manufacturing unit. BFPL also markets and sells Chickpea Flour (Besan) and Roasted Gram Flour (Sattu) under brand 'Panchakanya', however the company procures these products from third party manufacturers. Subsequently, the Company launched its brands under the name "Panchakanya" and "Bhajan" for marketing and selling of Whole Wheat Atta. 

As of date of this Red Herring Prospectus, BFPL markets and sells its products in Jharkhand, Odisha and West Bengal, however, the Company is proposing to expand its business operations in India by setting up an ultra-modern highly automated roller flour mill and chakki whole wheat atta mill in Patna and expand its market and customer base to Bihar, West Bengal, Andhra Pradesh, North East Region, Odisha and Jharkhand. Therefore, it has incorporated its wholly-owned subsidiary under the name Panchakanya Foods Private Limited. 

Its customer/distributor base is divided into five categories namely, institutional manufactures, modern traders, dealers, wholesalers and retailers. As of August 31, 2023, it had 85 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden book building route IPO of Rs. 33 cr. and will issue approx. 4342400 +equity shares at the upper price band. The company has announced a price band of Rs. 72 - Rs. 76 per share for equity shares having face value of Rs. 10. The issue opens for subscription on November 03, 2023, and will close on November07, 2023. The minimum application to be made is for 1600 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 26.57% of the post-IPO paid-up capital of the company. From the net proceeds of the IPO funds, the company will spend Rs. 20.30 cr. for automated roller flour mill and chakki whole wheat atta mill, Rs. 3.66 cr. for the purchase of machinery, Rs. 2.50 cr. for working capital, Rs. 2.00 cr. for repayment/prepayment of certain borrowings, and the rest for general corporate purposes. 

The company has reserved 217600 shares for the market maker and from the rest it has allocated not more than 1.95% for QIBs, not less than 69% for Retail Investors and not less than 29.05% for HNIs. 

Horizon Management Pvt. Ltd. is the sole lead manager and MAS Services Ltd. is the registrar of the issue. Nikunj Stock Brokers Ltd. is the market maker for the company. 

The company issued entire paid up equity capital at par value and has also issued bonus shares in the ratio of 3 for 2 in May 2023. The average cost of acquisition of shares by the promoters is Re. 1.00 per share. 

Post-IPO, company's current paid-up equity capital of Rs. 12.00 cr. will stand enhanced to Rs. 16.34 cr. Based on the upper price band of the IPO price, the company is looking for a market cap of Rs. 124.20 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has (on a consolidated basis) posted a total revenue/net profit of Rs. 107.70 cr. / Rs. 1.98 cr. (FY21), Rs. 97.56 cr. / Rs. 2.01 cr. (FY22), and Rs. 189.64 cr. / Rs. 5.03 cr. (FY23). For Q1 of FY24 ended on June 30, 2023, it earned a net profit of Rs. 1.92 cr. on a turnover of Rs. 41.39 cr. 

For the last three fiscals, BFPL has reported an average EPS of Rs. 4.18, and an average RoNW of 15.43%. The issue is priced at a P/BV of 3.39 based on its NAV of Rs. 22.44 as of June 30, 2023. Its IPO price band ad is missing data on post-IPO NAV on the basis of upper and lower price band. 

If we attribute FY24 annualized earnings to post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 16.14. Thus the issue appears fully priced discounting all near term positives. 

The company has reported PAT margins of 1.84% (FY21), 2.06% (FY22), 2.65% (FY23), and 4.65% (Q1-FY24), and RoCE margins of 10.46%, 8.41%, 15.81%, and 5.47% respectively for the referred periods. 

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 offer document, the company has shown Megastar Foods as their listed peers. It is trading at a P/E of 38.04 (as of October 30, 2023).  However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
This is the 2nd mandate from Horizon Management in the current financial year. The only listing (Cosmic CRF) took place so far opened at a discount of 20% on the day of listing. Thus it has a poor track record. 

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