Global Surfaces IPO review (May apply)

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Review By Dilip Davda on March 8, 2023

•    GSL is in the business of processing natural stones and manufacturing engineered quartz.
•    Based on FY23 annualized earnings, the issue is priced aggressively. 
•    Initial listing of the shares will be in the "T" group.
•    Well-informed/cash-surplus investors may consider it for long-term rewards.

ABOUT COMPANY:
Global Surfaces Ltd. (GSL) is engaged in the business of processing natural stones and manufacturing engineered quartz. Natural stones are produced by complex geological processes and include a number of products such as granite, limestone, marble, slate, quartzite, onyx, sandstone, travertine, and others that are quarried from the earth. Natural stones are widely known for their uniqueness, aesthetic appeal, texture, colour, and composition as no two natural stones are the same. 

Engineered quartz, on the other hand, is an example of engineered stone used in the countertop industry, which is a composite material made up of crushed stone bonded by an adhesive. However, in projected years between 2022 and 2027, engineered stone is expected to grow at a higher CAGR of 6-7% as compared to natural stone which is expected to grow at a CAGR of 5-6%. This is mainly because the engineered stones are non-porous, strong, durable and stain resistant. The engineered stones are also available in various colours and designs which is making them a preferred choice. (Source: CARE Report)

GSL has two units, one located at RIICO Industrial Area, Bagru Extn, Bagru, Jaipur, Rajasthan and the other at Mahindra World City SEZ, Jaipur, Rajasthan for processing and manufacturing of products. It's Unit I is strategically located in close proximity to the key raw material (i.e. blocks of natural stones) which helps in sourcing raw materials and also minimizes the logistics and transportation cost. 

This Unit II set up by GSL is dedicated towards manufacturing engineered quartz. This Unit is also equipped with an R&D facility to develop, improve and test products which assist the company in keeping pace with the ever-evolving market trends and demands. Both Units are located in close proximity to each other i.e., within a range of 20 kms. from one another.

GSL, through its wholly owned subsidiary, Global Surfaces FZE, intend to establish a dedicated unit for manufacturing engineered quartz in Dubai, UAE. on a lease of 20 years. As of January 31, 2023, it had 302 employees on its payroll. In addition, for production it has a contract with third-party manpower firms and independent contractors for the supply of contract labours as and when needed.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a book-building process combo IPO of 8520000 fresh equity shares and 2550000 equity shares under Offer for Sale (OFS) having a face value of Rs. 10 per share. Thus it is coming out with an overall 11070000 equity shares with a price band of Rs. 133 - Rs. 140 per share and mulls raising Rs. 154.98 cr. at the upper cap. The issue opens for subscription on March 13, 2023, and will close on March 15, 2023. The minimum application to be made is for 100 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. From the net proceeds, the company will utilize Rs. 90.00 cr. for investment in its wholly owned gulf region subsidiary namely, Global Surfaces FZE, and the balance for general corporate purposes. 

The company has allocated 50% for QIBs, 15% for HNIs and 35% for Retail investors. The issue constitutes 26.12% of the post-IPO paid-up capital of the company. 

Unistone Capital Pvt. Ltd. is the sole lead manager and Bigshare Services Pvt. Ltd. is the registrar of the issue. 

Having issued initial equity shares at par, GSL issued further equity shares in the price range of Rs. 40 to Rs. 100 per share between February 2007 and May 2018. It has also issued bonus shares in the ratio of 2 for 1 in April 2021 and 75 for 100 in March 2022. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 0.60 and Rs. 2.46 per share. 

Post-IPO, GSL's current paid-up equity capital of Rs. 33.86 cr. (33861818 shares) will stand enhanced to Rs. 42.38 cr. (42381818 shares). Based on the upper cap of the IPO price, the company is looking for a market cap of Rs. 593.35 cr.

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, GSL has (on a consolidated basis) posted a turnover/net profit of Rs.165.78 cr. / Rs. 20.96 cr. (FY20), Rs. 179.00 cr. / Rs. 33.93 cr. (FY21), and Rs. 198.36 cr. / Rs. 35.63 cr. (FY22).  For H1 of FY23 ended on September 30, 2022, it earned a net profit of Rs. 13.59 cr. on a turnover of Rs. 99.25 cr. While its top and bottom lines marked growth for FY20 to FY22, it has witnessed pressure on margins for FY23 as expressed by its performance so far. According to the management, erosion in bottom lines for FY23 working is due to the surge in logistics costs and a decline in its other income. 

For the last three fiscals, it has reported an average EPS of Rs. 9.63 and an average RoNW of 30.20%. The issue is priced at a P/BV of 3.18 based on its NAV of Rs. 43.98 as of September 30, 2022, and at a P/BV of 2.21 based on its post-IPO NAV of Rs. 63.29 per share (at the upper cap). GSL's margins are having declining trends and its RoE/RoCE has come down from 32.51% /32.95% as of March 31, 2020, to 9.12% /7.89% as of September 30, 2022, respectively. Its net capital turnover ratio too is down from 18.20 as of March 31, 2020, to 2.47 as of September 30, 2022. (refer to page 133 of the offer document).

If we annualize FY23 earnings and attribute it to post-IPO fully diluted paid-up equity capital, the asking price is at a P/E of around 21.84. Even if we attribute FY22 earnings, the P/E stands at 16.67. 

DIVIDEND POLICY:
The company has not declared any dividends for the last two fiscals till the filing of this offer document. 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 documents, GSL has shown Pokarna Ltd. as their listed peer. It is currently trading at a P/E of 12.53 (as of March 08, 2023). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
This is the 8th mandate from Unistone Capital in the last three fiscals (including the ongoing one). Out of the last 7 listings, 1 opened at a discount and the rest were listed at premiums ranging from 10.97% to 270.40% on the day of listing. 

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