CFF Fluid BSE SME IPO review (Avoid)

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Review By Dilip Davda on May 26, 2023

•    CFCL is in the business of providing defence sector equipment/services to the Indian Navy. 
•    It suffered a severe setback for FY21 on account of the pandemic. 
•    The sudden jump in bottom lines for FY22 and 9M of FY23 raises eyebrows.
•    It has an order book worth Rs. 90 cr. as of December 31, 2022.
•    The issue is aggressively priced to encase the boom for defence segment counters. 
•    There is no harm in skipping this pricey IPO. 

ABOUT COMPANY:
CFF Fluid Control Ltd. (CFCL) is primarily in the business of manufacturing and servicing shipboard machinery, critical component systems and test facilities for submarines & surface ships for The Indian Navy. Further, it also designs, manufactures and services Mechanical Equipment and systems for industries like Nuclear and Clean Energy.

The company was incorporated with the purpose of having a dedicated new entity focused on meeting the growing requirements of the Indian Navy, Mazagaon Dockyard and Shipbuilders Limited (MDL) for manufacturing and supplying mechanical equipment for the "Scorpion" Submarine Program of India. Soon after inception, a TOT (Transfer of Technology) was signed between CFF and Coyard SAS France for the design, manufacture and supply of Mechanical Components for the Scorpion submarine program. The TOT was approved by relevant authorities and after factory inspection; CFCL was awarded a license for the production of mechanical components for the Scorpion Submarine Program.

As of December 31, 2022, it has an order book worth Rs. 90.04 cr. As of December 31, 2022, it had 33 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden IPO of 5200000 equity shares of Rs. 10 each at a fixed price of Rs.165 per share to mobilize Rs. 85.80 cr. The issue opens for subscription on May 30, 2023, and will close on June 02, 2023. The minimum application to be made is for 800 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. The issue constitutes 26.70% of the post-IPO paid-up capital of the company. CFCL is spending Rs. 1.31 cr. for this IPO process and from the net proceeds, it will utilize Rs. 29.42 cr. for working capital, Rs. 21.00 cr. for repayment of loans, Rs. 8.86 cr. for the purchase of machinery and equipment, Rs. 8.50 cr. for acquiring technology for Towed Wire Antenna, and Rs. 16.71 cr. for general corporate purposes. 

Aryaman Financial Services Ltd. is the sole lead manager and Cameo Corporate Services Ltd. is the registrar of the issue. Aryaman Group's Aryaman Capital Markets Ltd. is the market maker for the company. 

Having issued initial equity shares at par, CFCL issued further equity shares at Rs. 50 per share between April 2013 - November 2015. It has also issued bonus shares in the ratio of 19 for 1 in July 2022. The average cost of the acquisition of shares by the promoters is Rs. 5.50 per share. 

Post-IPO, CFCL's current paid-up equity capital of Rs. 14.27 cr. will stand enhanced to Rs. 19.47cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 321.32 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, CFCL has posted a turnover/net profit of Rs. 31.96 cr. / Rs. 1.33 cr. (FY20), Rs. 14.81 cr. / Rs. 0.25 cr. (FY21), Rs. 47.12 cr. / Rs. 7.80 cr. (FY22). For the 9M of FY23 ended on December 31, 2022, it earned a net profit of Rs. 7.18 cr. on a turnover of Rs. 50.85 cr. Thus except for the Pandemic year, it reported growth in its top and bottom lines. However, a sudden jump in bottom lines for FY22 and 9MFY23 raises eyebrows. Its revenue includes around 90% from the Defence segment and the rest from the non-Defence segment. 

For the last three fiscals, CFCL has reported an average EPS of Rs. 2.94 and an average RoNW of 30.71%. The issue is priced at a P/BV of 10.70 based on its NAV of Rs. 15.42 as of December 31, 2022, and at a P/BV of 2.98 based on its post-IPO NAV of Rs. 55.35 per share. Its RoAE and RoCE have witnessed wild fluctuations for the reported periods. 

If we annualize FY23 earnings and attribute them to post-IPO paid-up equity capital, then the asking price is at a P/E of 33.54%. Thus the issue is aggressively priced. It appears the company is taking advantage of the current fancy for the defence segment and trying to milk the cow. 

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 shown Data Patterns, MTAR Tech, Paras Defence and Bharat Electronics as their listed peers. They are currently trading at a P/E of 72.38, 55.47, 54.53, and 26.89 (as of May 26, 2023). However, they are not truly comparable on an apple-to-apple basis. Peers comparison appears to be just an eyewash.

MERCHANT BANKER'S TRACK RECORD:
This is the 18th mandate from Aryaman Financial in the last four fiscals (including the ongoing one). Out of the last 10 listings, 1 opened at discount, 2 at par and the rest listed at premiums ranging from 0.02% to 27.18% on the listing date. 

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