Esprit Stones NSE SME IPO review (May apply)

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Review By Dilip Davda on July 24, 2024

 •    The company is in competitive business and has many tall claims.
•    Despite supremacy, it posted degrowth in its bottom lines for the reported periods.
•    Based on FY24 earnings, the issue appears fully priced, discounting all near term positives.
•    FY24 financial performance appears to have been window dressed for fancy valuations.
•    Well-informed investors may park moderate funds for the medium to long term.

ABOUT COMPANY:
Esprit Stones Ltd. (ESL) is primarily engaged in the manufacturing of Engineered Stones such as: (i) engineered quartz surfaces; and (ii) engineered marble surfaces. The Company majorly manufactures engineered quartz surfaces and through its Subsidiary, HSPL. The company manufactures engineered marble surfaces. It is one of the key Engineered Stones players in India. (Source: CARE Report). Engineered Stones are composite material formed out of crushed stone that is held together by an adhesive. Engineered Stone's non-porous characteristics, offer superior scratch, stain and heat resistance, making them extremely durable and therefore get an edge over competing products such as natural stones, laminate and other manufactured solid surfaces The strength, consistency, durability and appearance of Engineered Stones, as well as their low maintenance makes it ideal for its application for vanities & bathroom surfaces, kitchen countertops, floors and wall cladding furniture, and other interior surfaces that are used in a variety of residential and non-residential applications. 

Through its innovative design and manufacturing processes, It is able to offer product in wide variety of colours, styles, designs and textures. It has customized manufacturing processes in order to maximize the consistency, quality, durability and crack resistance of Engineered Stones while also increasing its slickness and luster. Together with its research and development capabilities, its manufacturing expertise enable the company to develop a number of aesthetically distinct designs for products. ESL continually works to ensure that it acquires high quality raw materials for Engineered Stones and ensure that its high-quality standards are met by conducting ongoing quality control checks of the raw materials and finished goods at Manufacturing Facilities.

Additionally, through its Subsidiary, Addwaya Chemicals, it is also engaged in the manufacturing of unsaturated polyester resin which is one of the key raw materials in manufacturing of Engineered Stones. At present it is one of the key Engineered Stones players in the Indian Market (Source: CARE Report) and markets and sells Engineered Stones in domestic as well as international markets through a combination of direct export sales and a network of independent distributors in the domestic market. As on the date of this Red Herring Prospectus, it is exporting to over 10 countries including USA, Canada, Egypt, Bulgaria, UAE, Saudi Arabia, etc. under white labelling. A majority of sales comprise of export sales.

Initially, the business of the Company was only export based. However, to capitalize the growing demand of Engineered Stones in domestic market, the Company launched premium brand 'Haiqu' which was later renamed as "Haique". As on the date of this Red Herring Prospectus, it has extended its reach to 15 states in the country through distributors network. The Company is in the process of setting up of an experience centre at Kishangarh, Rajasthan, the marble city of India. Additionally, the Company also has a storage facility and sales office in Mumbai, Maharashtra. As of May 31, 2024, it had 292 employees on its payroll, and the company also hires contract labourers as and when needed.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden book building route IPO of 5795200 equity shares of Rs. 10 each to mobilize Rs. 50.42 cr. at the upper cap. It has announced a price band of Rs. 82 - Rs. 87 per share. The issue opens for subscription on July 26, 2024, and will close on July 30, 2024. The minimum application to be made is for 1600 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 26.41% of the post-IPO paid-up capital of the company. From the net proceeds of the IPO, it will utilize Rs. 14.00 cr. for working capital, Rs. 19.50 cr. for investment in subsidiary (HSPL), Rs. 6.50 cr. for working capital in HSPL, and the rest for general corporate purposes. 

The company has reserved 128000 equity shares for its eligible employees and offering them a discount of Rs. 5 per share. From the rest, it has allocated 5.02% for Market Maker, not more than 50% for QIBs, not less than 15% for HNIs and not less than 35% for Retail investors. 

The issue is jointly lead managed by Choice Capital Advisors Pvt. Ltd., and Srujan Alpha Capital Advisors LLP, while Link Intime India Pvt. Ltd. is the registrar to the issue. CHOICE group's Choice Equity Broking Pvt. Ltd. is the market maker for the company. 

Having issued entire initial equity shares at par value so far (based on FV of Rs. 10 per share), It has also issued bonus shares in the ratio of 7 for 10 in December 2023. The average cost of acquisition of shares by the promoters is Rs. NIL, Rs. 3.56, Rs. 5.88, and Rs. 7.28 per share. 

Post-IPO, company's current paid-up equity capital of Rs. 16.15 cr. will stand enhanced to Rs. 21.95 cr. Based on the upper IPO price band, the company is looking for a market cap of Rs. 190.92 cr.  

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has (on a consolidated basis) posted a total income/net profit of Rs. 190.03 cr. / Rs. 18.51 cr. (FY22), Rs. 176.06 cr. / Rs. 3.56 cr. (FY23), Rs. 274.78 cr. / Rs. 10.32 cr. (FY24). The company posted inconsistency in its bottom lines for the reported periods. Drop in bottom line for FY24 raised concern. Its debt equity ratio of 1.72 as of March 31, 2024 appears worrisome. Its debt outstanding of Rs. 125.42 cr. as of March 31, 2024 raises alarm. 

For the last three fiscals, it has reported an average EPS of Rs. 5.77, and an average RoNW of 15.64%. The issue is priced at a P/BV of 1.94 based on its NAV of Rs. 44.82 as of March 31, 2024, and at a P/BV of 1.56 based on its post-IPO NAV of Rs. 55.93 at the upper cap.

If we attribute FY24 earnings to its post-IPO fully diluted paid-up capital, then the asking price is at a P/E of 18.51, and based on FY23 earnings, the P/E stands at 53.70. Thus the issue appears aggressively priced.

For the reported periods, the company has posted PAT margins of 9.92% (FY22), 2.04% (FY23), 3.78% (FY24), and RoCE margins of 25.05%, 7.60%, 12.39% respectively for the referred periods. 

DIVIDEND POLICY:
The company has not declared any dividends for the last five fiscals. 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 Pokarna Ltd., Pacific Ind., Global Surfaces, and Elegant Marbles, as their listed peers. They are trading at a P/E of 24.5, 17.1, 49.9 and 20.1 (as of July 24, 2024). However, they are not comparable on an apple-to-apple basis.

MERCHANT BANKER'S TRACK RECORD:
This is the 4th mandate from CHOICE CAPITAL in the last two fiscals (including the ongoing one), out of the last 2 listings, all listed with premiums ranging from 31.77% to 66.67% on the date of listing. 

This is the 3rd mandate from Srujan Alpha Capital in the last three fiscals (including the ongoing one). Out of the last 2 listings, all opened at a premiums ranging from 5% to 31.18% on the date of listing. 

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