Cospower Engg BSE SME IPO review (Avoid)

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Review By Dilip Davda on March 14, 2020

•    CEL is engaged in the business of manufacturing of electrical goods.
•    It has posted inconsistency in its top and bottom lines so far.
•    The company operates in a low margin high competition segment.
•    This is the first mandate from the Lead Manager and has no track record.
•    The issue is aggressively priced at a P/E of around 23.

ABOUT COMPANY:
Cospower Engineering Ltd. (CEL) that was started as a partnership firm for trading and marketing of electric goods is currently engaged in the business of manufacturing of electrical panels, harmonic filters and substation and equipment mounting structure. The plant is equipped with machinery to produce quality products with an emphasis on quality and performance. The Company has also been providing turnkey services which involve supply, installation, commissioning, testing and comprehensive maintenance of electric products. There are few products which the Company do not manufacture but has to provide turnkey services by buying from other manufacturers. CEL has extended its product range to other power-related products that are needed to complete the electrical system. It is offering 'under one roof' a complete package of electrical system and solutions.

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its working capital (Rs. 1.175 cr.) and general corpus fund needs (Rs. 0.38 cr.),  CEL is coming out with a maiden IPO of 400000 equity shares of Rs. 10 each at a fixed price of Rs. 51 per share to mobilize Rs.2.04 cr. The issue opens for subscription on 17.03.20 and will close on 19.03.20. Minimum application is to be made for 2000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. The issue constitutes 26.67% of the post issue paid-up capital of the company. This issue is solely lead managed by Shreni Shares Pvt. Ltd. and Bigshare Services Pvt. Ltd. is the registrar to the issue. Shreni Shares Pvt. Ltd. is also acting as a market maker for this issue. CEL is spending Rs. 0.485 cr. (23.8%) of the total issue) for the entire IPO process. Thus the issue is fully structured with funding arrangements.

Having issued initial equity at par, CEL raised further equity for Rs. 127 per share in February 2020. It has also issued bonus shares in the ratio of 17 for 3 in December 2019. The average cost of acquisition of shares by the promoters is Rs. 12.91 per share. CEL's current paid-up equity capital of Rs. 1.10 cr. will stand enhanced to Rs. 1.50 cr. post this issue.  Post this issue, CEL is looking for a market cap of Rs. 7.65 cr.

FINANCIAL PERFORMANCE:
For the last three fiscals, as per restated financial data, CEL has posted turnover/net profits of Rs. 9.57 cr. / Rs. 0.28 cr. (FY17), Rs. 8.61 cr. / Rs. 0.19 cr. (FY18) and Rs. 13.03 cr., / Rs. 0.52 cr. (FY19). Thus CEL has shown inconsistency in the top and bottom lines. For the first nine months of FY20, it has earned a net profit of Rs. 0.25 cr. on a turnover of Rs. 7.49 cr. Boost in net profit for pre-IPO year raises concern.

For the last three fiscals, CEL has posted an EPS of Rs. 3.69 and an average RoNW of 27.59%. The issue is priced at a P/BV of 1.81 based on its NAV of Rs. 28.21 as on 20.02.20 and at a P/BV of 1.49 based on post-issue NAV of Rs. 34.29.

If we annualize latest earnings and attribute it on fully diluted post issue equity, then asking price is at a P/E of around 23 making it aggressively priced offer.

COMPARISION WITH LISTED PEERS:
As per offer documents, CEL has no listed peers to compare with.

MERCHANT BANKER'S TRACK RECORD:
This is the maiden mandate from this merchant banker and has no track record.

Cospower Engineering IPO FAQs