Deem Roll NSE SME IPO review (May apply)

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Review By Dilip Davda on February 16, 2024

•    DRTL is in the business of manufacturing high-quality steel and alloy rolls in India.
•    It posted steady growth in its top and bottom lines for the reported periods. 
•    With push for infra development and expansion of steel industry, this company is poised for bright prospects ahead. 
•    Based on its FY24 annualized earnings, the issue appears fully priced. 
•    Investors may park moderate fund for the medium to long term rewards. 

ABOUT COMPANY:
Deem Roll Tech Ltd. (DRTL) is one of the manufacturers of high-quality steel and alloy Rolls in India, which is the building block of the iron and steel rolling mill industry. The Rolls manufactured by the Company finds its application in the iron and steel rolling mill industries in the domestic and international markets. 

The company has been synonymous with quality and reliability in the Roll manufacturing industry which it manufactures both under standard specification and tailored as per the customer specific requirements. It supplies Rolls directly to rolling mill manufacturers ("OEMs") and in the replacement market to the iron and steel rolling mills through a network of dealers / distributors and agents. The company exports Rolls to over 10 countries, such as USA, Germany, Europe, Middle East, Oman, Saudi Arabia, South Africa, Nepal and Bangladesh. 

As on September 30, 2023, the company has catered to over 340 domestic customers and 30 export customers. It manufactures products from steel scrap, roll scrap, pig iron, nickel, ferro molybdenum, other ferro alloys, resin coated sand, etc. conforming to international standards. Its manufacturing Units consists of engineering & design, mold making, melting, casting, machining and dispatch sections backed by related quality testing and assurance equipment. Presently, it uses static cast and centrifugally cast technology for the manufacturing of Rolls. 

Rolls are tailor-made as per the mill requirement of the customers. Since a major quantity of the cast Rolls and forged Rolls are produced for use in the rolling mills of the steel industry, hence the Roll industry is closely related to the steel industry. The growth in the steel industry offers good potential for Rolls manufacturers. With both automobile and infrastructure sectors showing healthy growth rate, there will be a demand-push effect for both flat product and long product rolls. Demand for high-quality, high performance cast rolls, which are indispensable to the rolling of high-grade steel sheets or strips, is expected to undergo significant growth. Accordingly, the demand for Rolls will be directly related to capex plans of the iron and steel industry and also the demand for steel. As of March 31, 2023, it had orders worth approx. Rs. 55 cr. from 129 customers. As of December 31, 2023, it had 275 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden IPO of 2268000 equity shares of Rs. 10 each at a fixed price of Rs. 129 per share to mobilize Rs. 29.26 cr. The issue opens for subscription on February 20, 2024, and will close on February 22, 2024. The minimum application to be made is for 1000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 27.20% of the post-IPO paid-up capital of the company. The company is spending Rs. 4.98 cr. for this IPO and from the net proceeds, it will utilize Rs. 20.00 cr. for capex on expansion of its existing manufacturing facility, Rs. 3.50 cr. for working capital and Rs. 0.78 cr. for general corporate purposes.

The issue is solely lead managed by Fedex Securities Pvt. Ltd., and Bigshare Services Pvt. Ltd. is the registrar of the issue. SS Corporate Securities Ltd. is the market maker for the company. 

The company has issued/converted initial equity capital at par and has issued further equity shares in the price range of Rs. 129 - Rs. 200 per share between October 2009 and February 2024. It has also given bonus shares in the ratio of 3.22 for 1 in July 2023. The average cost of acquisition of shares by the promoters is Rs. 6.48, and Rs. 20.60 per share.

Post-IPO, company's current paid-up equity capital of Rs. 6.07 cr. will stand enhanced to Rs. 8.34 cr. Based on the upper IPO price band, the company is looking for a market cap of Rs. 107.55 cr.  

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has posted a total income/net profit of Rs. 64.62 cr. / Rs. 2.98 cr. (FY21), Rs. 92.12 cr. / Rs. 4.10 cr. (FY22), and Rs. 104.49 cr. / Rs. 6.92 cr. (FY23). For H1 of FY24 ended on September 30, 2023, it earns a net profit of Rs. 3.72 cr. on a total income of Rs. 50.28 cr. Thus its top and bottom lines posted growth for the reported periods. 

For the last three fiscals, it has reported an average EPS of Rs. 9.12, and an average RONW of 17.34%. The issue is priced at a P/BV of 1.99 based on its NAV of Rs. 64.76 as of September 30, 2023, and at a P/BV of 1.54 based on its post-IPO NAV of Rs. 84.02 per share.

If we attribute annualized FY24 earnings to its post-IPO fully diluted paid-p capital, then the asking price is at a P/E of 14.46. Thus the issue appears fully priced. 

For the reported periods, the company has posted PAT margins of 4.67% (FY21), 4.47% (FY22), 6.69% (FY23), 7.42% (H1-FY24), and RoCE margins of 21.68%, 18.27%, 20.26%, 9.93% respectively for the referred periods. 

DIVIDEND POLICY:
The company has not declared any dividends since incorporation. It will adopt a prudent dividend policy based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per the offer document, the company has shown Tayo Rolls as their listed peers. It is trading at a P/E of NA (as of February 16, 2024). However, they are not comparable on an apple-to-apple basis.

MERCHANT BANKER'S TRACK RECORD:
This is the 26th mandate from Fedex Securities in the last four fiscals, out of the last 10 listings, 2 opened at discount and the rest with premiums ranging from 6.49% to 140.82% on the date of listing. 

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