GEM Enviro BSE SME IPO review (Apply)

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Review By Dilip Davda on June 11, 2024

•    The company is engaged in providing collection and recycling of all kinds of packaging waste.
•    It diversified into implementation of plastic extended producer responsibility programme.
•    Currently it is providing advisory role for PWM Rules to minimize plastic waste issue.
•    It posted growth in its top and bottom lines from FY21 to FY23.
•    The boost in bottom line for 9MFY24 indicates the future prospects.
•    Based on FY24 annualized super earnings, the issue appears fully priced. 
•    Investors may park funds for the medium to long term rewards. 

ABOUT COMPANY:
Gem Enviro Management Ltd. (GEML) was established in the year 2013 for collection and recycling of all kinds of Packaging waste including the Plastic Waste. Subsequently, the company diversified to implementation of Plastic Extended Producer Responsibility Programmes for various organization (to fulfill their obligations as per PWM Rules 2016 and amendments) and which has become the largest Business vertical of the Company (contributing to 82.41% of revenue in the year 2022-2023).

Collection and recycling of Industrial Plastic Waste contributed to 17.42% of revenue and Sales and marketing of recycled products contributed to 0.18% of revenue in FY 2022-2023. Further in year 2023-2024 the company has ventured into new additional businesses in the field of Sustainability and as on today the Company provides following Services:

1. EPR consultancy and fulfilment for Plastic Waste
2. Collection and recycling of Industrial Plastic Waste
3. Sales and Marketing of recycled products
4. ESG Consulting and BRSR (Business Responsibility and Sustainability Reporting)

In addition, the company also organizes awareness programmes for making people aware about proper disposal of plastic waste and need of recycling on a regular basis. Established in the year 2013, from the year 2013 to 2018, it was engaged in trading of plastic waste material and trading of the merchandise manufactured out of the waste recycling. The company was committed to sustainable plastic waste management and environmental stewardship, providing a basket of services to its customers that includes but not limited to plastic waste collection and sorting, recycling and repurposing, waste trading, providing environment consultancy etc. 

In the year 2016, Ministry of Environment, Forest and Climate Change (Ministry) notified Plastic Waste Management Rules, 2016 ("PWM Rules"). The PWM Rules mandate the generators of plastic waste to take steps to minimize generation of plastic waste, not to litter the plastic waste, ensure segregated storage of waste at source & hand over segregated waste in accordance with rules. As part of this initiative, the ministry also issued comprehensive guidelines on Extended Producer Responsibility (EPR) for plastic packaging in February 2022. These guidelines establish a structure for the effective implementation of EPR, outlining the specific duties and obligations of Producers, Importers, Brand Owners, Recyclers, Waste Processors, and other relevant stakeholders.

According to the management, the company is debt free and is operating on an asset light business model and is the emerging leader in PWM segment and are confident of maintaining the growth trends posted so far. It enjoys good market share of around 21-25% in the segment amongst unlisted peers and is the most preferred service provider amongst 200+ renowned industry players. 

However, Company's current debtors' day of 250+ days will reduce to 210 days, but still remains as a major concern. As of the date of filing this offer document, it had 51 employees on its payroll.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden combo book building route IPO of 5990400 equity shares of Rs. 10 each to mobilize Rs. 44.93 cr. at the upper cap. The IPO consists of 1497600 fresh equity shares (worth Rs. 11.23 cr. at the upper cap), and an Offer for Sale (OFS) of 4492800 shares (worth Rs. 33.70 cr. at the upper cap), It has announced a price band of Rs. 71 - Rs. 75 per share. The issue opens for subscription on June 19, 2024, and will close on June 21, 2024. The minimum application to be made is for 1600 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. The issue constitutes 26.56% of the post-IPO paid-up capital of the company. From the net proceeds of the fresh equity issue, it will utilize Rs. 7.00 cr. for working capital, and the rest for general corporate purposes. 

The issue is jointly lead managed by Share India Capital Services Pvt. Ltd., and Fintellectual Corporate Advisors Pvt. Ltd., while Skyline Financial Services Pvt. Ltd. is the registrar to the issue. Share India group's Share India Securities Ltd. is the market maker for the company. The IPO is underwritten to the extent of 85% by Share India Capital and 15% by Fintellectual Corporate. 

Having issued initial equity share at par value, the company issued further equity shares in the price range of Rs. 14 -Rs. 239.50 (based on Rs. 5 FV). It has also issued bonus shares in the ratio of 16 for 1 in September 2023, and 1 for 1 in December 2023. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 0.15, Rs. 0.24, and Rs. 0.41 per share. 

Post-IPO, company's current paid-up equity capital of Rs. 10.53 cr. will stand enhanced to Rs. 11.28 cr. Based on the upper IPO price band, the company is looking for a market cap of Rs. 169.13 cr.  

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has posted a total revenue/net profit of Rs. 25.61 cr. / Rs. 5.83 cr. (FY21), Rs. 32.92 cr. / Rs. 7.45 cr. (FY22), and Rs. 42.81 cr. / Rs. 10.02 cr. (FY23). For 9M of FY24 ended on December 31, 2023, it earned a net profit of Rs. 8.40 cr. on a total revenue of Rs. 26.21 cr. 

For the last three fiscals, it has reported an average EPS of Rs. 4.01, and an average RoNW of 56.36%. The issue is priced at a P/BV of 5.09 based on its NAV of Rs. 14.74 as of December 31, 2023, and at a P/BV of 4.00 based on its post-IPO NAV of Rs. 18.74 per share (at the upper cap).

If we attribute annualized FY24 earnings to its post-IPO fully diluted paid-up capital, then the asking price is at a P/E of 15.09. Thus the issue appears fully priced. However, considering the industry trends, the company is poised for bright prospects ahead.

For the reported periods, the company has posted PAT margins of 22.78% (FY21), 22.64% (FY22), 23.40% (FY23), 31.84% (9M-FY24), and RoCE margins of 76.58%, 58.15%, 55.98%, 36.55% respectively for the referred periods. 

DIVIDEND POLICY:
The company paid a dividend of Rs. 0.54 cr. (FY22), and Rs. 1.49 cr. (FY23). It has adopted a prudent dividend policy in the month of December 2023, based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per the offer document, the company has no listed peers to compare with. 

MERCHANT BANKER'S TRACK RECORD:
This is the 11th mandate from Share India Capital in the last two fiscals (including the ongoing one), out of the last 10 listings, 1 opened at discount, 2 at par and the rest with premiums ranging from 5.33% to 120% on the date of listing. 

This is the first mandate from Fintellectual Corporate in the current fiscals, and has no past track record. 

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