Crayons Advertising NSE SME IPO review (May apply)

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Review By Dilip Davda on May 19, 2023

•    CAL is an integrated marketing and communication agency.
•    After average performance till FY22, it marked superb performance. 
•    Based on the inflated profits for 9M-FY23, the issue appears lucratively priced.
•    The sustainability of super margins going forward is a major concern.
•    Well-informed investors may park funds for medium-term rewards.

ABOUT COMPANY:
Crayons Advertising Ltd. (CAL) is an Integrated marketing and communications agency, that provides 360-degree solutions to its wide array of clients. The company was incorporated by the founder and Chairman Mr. Kunal Lalani with an object and vision to provide advertising solutions. The company is in the same industry for the past 36 years and is continuously expanding its business horizons with the moving trends across the world, reflecting its growing expertise in the marketing and advertising industry.

The wide area of scope of work being offered and provided by Crayons to its clients make it one of the few agencies that can truly claim to be a fully integrated and independent in providing marketing and communications solutions. It offers world-class creative, exceptional brand marketing strategy, pragmatic online & offline media planning & buying, cutting-edge digital expertise, on-ground & virtual activation capabilities, and design solutions that help its clients in brand building. 

It provides a high-end ecosystem and end-to-end ad-tech communication solutions platform for advertising media services consisting of Brand Strategy, Events, Digital Media, Print Media, and Outdoor (OOH) Media services which cover advertisement modes such as Newspapers, Brochures, Magazines, Television Channels, FM channels and display of Outdoor Hoardings, etc. 

With an aim to retain clients, the company provide an apt solution to the marketing needs of the clients. It can understand the various media (advertising modes) available and how to use the right mix of media per client's objectives. Therefore, Crayons' growth and expansion are clearly visible through the fact that the company is now operating through 5 (five) offices located in New Delhi, Mumbai, Chennai, Kolkata, and Lucknow. As of the said date, it has 188 employees on its payroll. 

Its marquee client list includes Kajaria Ply, LIC, Air India, Kohinoor Foods, Casio, Delhi Police, SBI, Korea Tourism, APL Apollo, etc. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden IPO of 6430000 equity shares of Rs. 10 each via a book-building process to mobilize Rs. 41.80 cr. at the upper cap. It has announced a price band of Rs. 62 - Rs. 65 per share. The issue opens for subscription on May 22, 2023, and will close on May 25, 2023. The minimum application to be made is for 2000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 26.32% of the post-IPO paid-up equity capital of the company. From the net proceeds of the IPO money, it will utilize Rs. 14.52 cr. for working capital, Rs. 15.30 cr. for capex on infrastructure and cutting-edge technology for expansion, and the rest for general corporate purposes. 

The net issue excluding the Market Maker portion (322000 shares i.e. 5%) is allocated as not more than 50% for QIBs, not less than 15% for HNIs, and not less than 35% for Retail investors. 

Corporate Capital Ventures Pvt. Ltd. is the sole lead manager, Skyline Financial Services Pvt. Ltd. is the registrar of the issue and SS Corporate Securities Ltd. is the market maker for the company. 

CAL has issued its entire equity capital at a par value so far and has also issued bonus shares in the ratio of 1 for 1 in September 1996, and 7 for 1 in December 2022.  The average cost of acquisition of shares by the promoters is Rs. 0.81, Rs. 1.25, and Rs. 1.35 per share. 

Post-IPO, CAL's current paid-up equity capital of Rs. 18.00 cr. will stand enhanced to Rs. 24.43 cr. Based on the upper cap of the IPO price, the company is looking for a market cap of Rs. 158.80 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, CAL has posted a total revenue / net profit of Rs.163.68 cr. / Rs. 1.17 cr. (FY20), Rs. 106.61 cr. / Rs. 0.13 cr. (FY21), and Rs. 194.05 cr. / Rs. 1.61 cr. (FY22). For 9M of FY23, it earned a net profit of Rs. 12.67 cr. on total revenue of Rs. 203.75 cr. Thus the bumper profit for 9M-FY23 raised eyebrows and concern over sustainability. 

For the last three fiscals, CAL has reported an average EPS of Rs. 0.58 and an average RoNW of 2.82%. The issue is priced at a P/BV of 2.34 based on its NAV of Rs. 27.73 as of December 31, 2022, and at a P/BV of 1.73 based on its post-IPO NAV of Rs.37.54 per share (at the upper cap). Till this morning (i.e. 20.05.23) CAL's own website is missing its financial track records and Annual Reports. 

If we annualize its super earnings of 9M FY23 and attribute it to post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 9.39 making it a lucratively priced offer with perhaps inflated profits in a pre-IPO year differing from its historical trends, but based on its FY22 earnings, it is at a P/E of 98.48 and making it an aggressively priced one. 
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DIVIDEND POLICY:
The company has not declared any dividends for any financial year. 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 Affle (India), Vertoz Advertising, and Pressman Advertising as their listed peers. They are currently trading at a P/E of 182.35, 79.41, and 49.35 (as of May 19, 2023). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
This is the 14th mandate from Corporate Capital Ventures in the last eight fiscals (including the ongoing one). Out of the last 10 listings, 3 opened at discount and the rest listed at premiums ranging from 0.61% to 231.63% on the listing date.

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