Divyadhan Recycling NSE SME IPO review (Apply)

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Review By Dilip Davda on September 23, 2024

•    The company is into the business of manufacturing of recycled polyester staple fibre and recycled pellets.
•    It posted almost static top lines for the reported fiscals, but marked surge in bottom lines for FY23 and FY24.
•    It is operating in a highly competitive and fragmented segment.
•    Based on FY24 earnings, the issue appears fully priced. 
•    Investors may park funds for the long term.

ABOUT COMPANY:
Divyadhan Recycling Industries Ltd. (DRIL) is into the business of manufacturing of Recycled Polyester Staple Fibre (R-PSF) and Recycled Pellets. The recycled fibre and pellets are produced from post-consumer PET bottles also known as Polyethylene Terephthalate bottles. The company started its operations in the financial year 2018-19, by manufacturing Recycled Polyester Staple Fibre (R-PSF) at their manufacturing facility based in Baddi, Himachal Pradesh with a capacity of 8030 Metric tons per annum. Further, in November 2023, it also started manufacturing of Recycled Pellets. However, the company is in the trial stage of manufacturing the recycled pellets.

DRIL produces Hollow and Solid Recycled Polyester Staple Fibre, which gives good resilience properties and is used to make premium pillows, cushions and quilts. The recycled fibre is supplied to various industries such as Packaging, home furnishing and Textiles. Its hollow structure adds to its insulating properties, making it suitable for use in a wide range of products including clothing, home furnishings, automotive components, non-woven fabrics, and insulation materials. The recycled pellets are used to manufacture food grade and non-food grade bottles. FSSAI has issued latest instructions dated June 15, 2022, for acceptance criteria for recycled PET for food packaging. Further, the company is currently catering to non-food industries requiring recycled bottles for their packaging.

DRIL is also involved in the producing of Recycled Pellets, which has various applications across various industries like automotive, packaging, fiber etc. However, it is into the trail stage of production of Recycled pellets. It sources raw material (post-consumer PET bottles) from various junk collectors and recycle them to produce Recycled Polyester Staple Fibre and Recycled Pellets. As of August 31, 2024, it had 83 employees on its payroll and additional 23 contract workers.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden book building route IPO of 3776000 equity shares of Rs. 10 each to mobilize Rs. 24.17 cr. (at the upper cap). It has announced a price band of Rs. 60 - Rs. 64 per share. The issue opens for subscription on September 26, 2024, and will close on September 30, 2024. 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 26.39% of the post-IPO paid-up capital of the company. From the net proceeds of the fresh equity issue, the company will utilize Rs. 17.04 cr. for purchase of plant and machinery, and the rest for general corporate purposes.

The issue is solely lead managed by Narnolia Financial Services Ltd., Skyline Financial Services Pvt. Ltd. Is the registrar to the issue, while Kantilal Chhaganlal Securities Pvt. Ltd. Is the market maker. The issue is underwritten to the tune of 15.04% by Narnolia Financial and up to 84.96% by Kantilal Chhaganlal.

Having issued initial equity shares at par, the company issued/converted further equity shares in the price range of Rs. 21 - Rs. 64 per share between December 2023, and March 2024. It has also issued bonus shares in the ratio of 1 for 1 in June 2024. The average cost of acquisition of shares by the promoters is Rs. 5.05 per share. 

Post-IPO, company's current paid-up equity capital of Rs. 10.53 cr. will stand enhanced to Rs. 14.31 cr. Based on the upper cap of IPO price band, the company is looking for a market cap of Rs. 91.56 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has posted a total income/net profit of Rs. 59.82 cr. / Rs. 0.53 cr. (FY22), Rs.  58.16 cr. / Rs. 2.16 cr.  (FY23), Rs. 59.13 cr. / Rs. 2.38 cr. (FY24). While its top line remained almost static for the last three fiscals, it marked surge in bottom lines for FY 23 and FY24.

According to the management, with most modern technology and with modification and debottle-necking the plant, it has been able to produce high margin and quality products that has seen rising demand and that has helped it in posting good bottom lines for the last two fiscals. With the addition of new machinery, it will be able to improve its top and bottom lines in coming years with value added products. It also has good potential in the global markets for its products marketing.

For the last three fiscals, it has reported an average EPS of Rs. 2.03 and an average RoNW of 19.04%. The issue is priced at a P/BV of 4.90 based on its NAV of Rs. 13.06 as of March 31, 2024, and at a P/BV of 2.36 based on its post-IPO NAV of Rs. 27.14 per share (at the upper cap).

If we attribute FY24 super earnings to its post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 38.55. Based on FY23 earnings, the P/E stands at 42.38. Thus the issue relatively appears aggressively priced. 

The company reported PAT margins of 0.92% (FY22), 3.77% (FY23), 4.24% (FY24), and RoCE margins of 10.30 %, 25.48%, 20.76% for the referred periods, respectively.

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

COMPARISION WITH LISTED PEERS:
As per the offer document, the company has shown Ganesha Eco, as their listed peers. It is trading at a P/E of 79.2 (as of September 20, 2024). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
This is the 13th mandate from Narnolia Financial in the last two fiscals (including the ongoing one). Out of the last 10 listings, 2 opened at discount, and the rest with premiums ranging from 4.35% to 110.36% on the date of listing.

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