Clara Ind BSE SME IPO review (Avoid)

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Review By Dilip Davda on December 14, 2021

•    CIL is engaged in flexible packaging solutions. 
•    Its financial performance is not in line with the asking price. 
•    Based on FY21 and H1FY21, the issue is exorbitantly priced. 
•    The company is in a highly competitive and fragmented sector. 
•    There is no harm in ignoring this pricy issue. 

ABOUT COMPANY:
Clara Industries Ltd. (CIL) is engaged in the business of providing flexible plastic packaging solutions to clients. It serves varied sectors spanning FMCG, Consumer Product, Hardware Tools, Hospitality, Housekeeping, Pharmaceuticals, Clothing & Hosiery, Edible Oil, Salt and Sugar. The company is known in the industry for manufacturing and supplying high-end multilayer Plastic bags and multilayer plastic rolls in India. 

CIL's promoters initially started the business of flexible packaging way back in the year 2014 in the name of M/s Clara Petrochemicals, a sole proprietorship firm. In flexible packaging, it manufactures printed films with surface printing as well as reverse printing, films between 51 microns and above as mandated by government laws and also laminates in two, three and four-layer structures. CIL also manufactures standing pouches, side gazette pouches, Press & lock pouches and other pouches as per customer's requirements. 

It regularly conducts batch-wise tests on all products for examining their strength, quality aspects etc. Its machines are capable of manufacturing multiple products at one point in time CIL's business is not seasonal in nature but demand for some items such as Plastic bangles and peanuts packaging are seasonal. It manufactures plastic bangles which sell mostly during the festive time like Diwali and Karva Chauth whereas demand for peanuts tends to increase during the period September to January. Moreover, the company do assemble plastic packaging machines for client. This is an additional business that the company runs. As of the date of filing this prospectus, it had 18 employees on its payroll.

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its needs for working capital (Rs. 2.00 cr.) and general corporate purpose (Rs. 0.64 cr.)  CIL is coming out with a maiden IPO of 702000 equity shares of Rs. 10 each at a fixed price of Rs. 43 per share to mobilize Rs. 3.02 cr. The issue opens for subscription on December 16, 2021, and will close on December 21, 2021. Minimum application is to be made for 3000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. The issue constitutes 28.30% of the post issue paid-up capital of the company. CIL will be spending Rs. 0.37 cr. for this IPO process.

The issue is solely lead managed by Gretex Corporate Services Ltd., while Bigshare Services Pvt. Ltd. is the registrar to the issue. Gretex Share Broking Pvt. Ltd. is the market maker for this IPO. 

Having issued initial equity at par, the company issued further equity at Rs. 75 per share in November 2021 and also issued bonus shares in the ratio of 6 for 1 in the same month. The average cost of acquisition of shares by the promoters is Rs. 6.25 and Rs. 17.76 per share. 

Post issue CIL's current paid-up equity capital of Rs. 1.78 cr. (1778980 shares) will rise to Rs. 2.48 cr.  (2480980 shares). Based on the IPO pricing, the company is looking for a market cap of Rs. 10.67 cr.

FINANCIAL PERFORMANCE:
On the financial performance front, as a proprietorship concern under the name of Clara Petrochemicals, it posted turnover/net profits of Rs. 2.22 cr. / Rs. 0.07 cr. (FY19), Rs. 2.37 cr. / Rs. 0.07 cr. (FY20) and Rs. 3.06 cr. / Rs. 0.20 cr. (FY21) and Rs. 1.49 cr. / Rs. 0.05 cr. for the H1 of FY22. As a corporate entity, from 01.10.21 to 18.11.21 it has posted a turnover of Rs. 0.63 cr. and a net profit of Rs. 0.30 which is mindboggling as well as surprising. The sustainability of such performance is ruled out in the near term. 

The issue is priced at a P/BV of 0.58 based on its NAV of Rs. 74.21 (on a post bonus basis) as of November 18, 2021, and at a P/BV of 2.18 based on its post-IPO NAV of Rs. 19.77. 

If we annualized its working for the last 49 days reported working as a corporate entity (till November 18, 2021) and attribute it to post issue fully diluted equity then the asking price is at a P/E of 4.78, but it is missing the true picture. If we base it on FY21 working, P/E stands at 53 and on H1 FY22 annualized numbers, it stands at 107.50. Thus the issue is exorbitantly priced. 

COMPARISON WITH LISTED PEERS:
As per the offer document, CIL has shown Uflex Ltd. as its listed peer. It is currently trading at a P/E of 18.19 (as of December 14, 2021). However, it is not truly comparable on an apple-to-apple basis.
    
DIVIDEND POLICY:
The company has not paid any dividends for the last five years. It will adopt a prudent dividend policy post listing based on its financial performance and future prospects. 

MERCHANT BANKER'S TRACK RECORDS:
This is the 8th mandate from Gretex Corporate in the last three fiscals (including the ongoing one). Out of the last 7 listings, 2 opened at discount and the rest with premiums ranging from 0.55% to 21.89% on the day of listings. LM has an average track record.

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