Greenchef Appliances NSE SME IPO review (May apply)

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Review By Dilip Davda on June 20, 2023

•    GAL is engaged in the manufacturing and marketing of kitchen appliances.
•    It posted erratic bottom lines for the last three fiscals. 
•    The sudden spurt in bottom lines for 3Qs of FY23 raises eyebrows.
•    Some window dressing is done for the fancy price of the IPO in the latest financial performance.
•    Its borrowing has increased in the last three fiscals.
•    Well-informed investors may park funds in this greedily priced issue.

ABOUT COMPANY:
Greenchef Appliances Ltd. (GAL) is engaged in the business of manufacturing and marketing a wide range of kitchen appliances under the brand name Greenchef. Its kitchen appliances include a wide range of solutions comprising Gas Stoves, Pressure Cookers, Mixer Grinders, Wet Grinders, Electric Rice Cooker, Induction Cooktops, Non-stick Cookware like Tawa, Fry Pans, Kadai, Biriyani Pot, Tadka Pan, Paniyarakkal, Appamchetty, etc., Kettles, Hose Pipes, Gas Cylinder Trolley and Spin Mop. 

Further, the company is also engaged in the marketing of appliances like chimneys, Stainless Steel Utensils, Blenders, Vegetable Chopper, Silicon gaskets, Water Bottles, Fans, Iron etc. Its range of products is offered at different pricing points to meet diverse customer requirements.

It manufactures the majority of core products like railing pipe, mixing tubes, brass burners, pan support etc. required in Gas Stoves, weight valves and vent tubes required in pressure cookers, mixi motors and jars required in Mixer Grinders etc. This enables it to control and monitor the quality and costs of these products. For certain product categories and sub-categories, the company engages in sourcing from third-party manufacturers both domestically and from outside India. For sourced products, it has a dedicated team to undertake inspection and ensure that such products are built to suit their specifications in terms of design and quality. 

GAL also provides after-sales services in relation to its products. These services include repairs and maintenance of sold goods and installation Services. Its service charges vary from type of service (In warranty, out - of warranty), place of service (Home service, dealer location service) and the nature or type of the product. The service charges depend on the type of product and services availed by the customers. 

As of December 31, 2022, its service team is comprised of 130 service technicians across 13 states. Further, it has also appointed 107 authorized service providers across 15 states. Its CRM software enables it to track customer requests and after-sales support to ensure customer satisfaction. It has three manufacturing facilities located in Bengaluru, Karnataka and one manufacturing facility located at Parwanoo, Himachal Pradesh. Its Parwanoo facility is focused on manufacturing Gas Stoves and hose pipes for which the company has also entered into a marketing agreement with oil companies like Hindustan Petroleum Corporation Limited, Indian Oil Corporation Limited and Bharat Petroleum Corporation Limited. Under these agreements, they authorize GAL to use its logo on its products like Gas Stoves, Hose pipes, trolleys etc. manufactured as per their specifications. The said products are sold to distributors and they in turn sell to dealers that are mostly Authorized Gas Agencies of these oil companies.

As of December 31, 2022, its manufacturing facilities are well connected with five strategically located C&F agents in the state of Rajasthan Maharashtra, Uttar Pradesh, Gujarat and Bihar. Additionally, as of December 31, 2022, it had around 450 distributors in 22 states and 3 union territories of India. As of the said date, it had approx. 1400 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden IPO of 6163200 equity shares of Rs. 10 each via book building route to mobilize Rs. 53.62 cr. at the upper cap. It has announced a price band of Rs. 82 - Rs. 87 per share. The minimum application to be made is for 1600 shares and in multiples, thereon, thereafter. The issue opens for subscription on June 23, 2023, and will close on June 27, 2023. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 26.48% of the post-IPO paid-up equity capital of the company. Post reservation of 312000 (5%) shares for the market maker, the company has allocated 2923200 (50%) shares for QIBs, 878400 (15%) shares for HNIs, and 2049600 (35%) shares for Retail investors. 

From the net proceeds of the IPO funds, it will utilize Rs. 5.15 cr. for the installation of additional plant and machinery, Rs. 25.00 cr. for the construction of the factory building, Rs. 10.00 cr. for working capital and the rest for general corporate purposes. 

Hem Securities Ltd. is the sole lead manager and Link Intime India Pvt. Ltd. is the registrar of the issue. Hem Groups Hem Finlease Pvt. Ltd. is the market maker for the company. 

Having issued initial equity shares at par value, the company issued further equity shares in the price range of Rs. 50 - Rs. 160 between March 2011 and April 2017. It has also issued bonus shares in the ratio of 19 for 5 in February 2023. The average cost of acquisition of shares by the promoters is Rs. 0.52, Rs. 8.33, Rs. 10.42, Rs. 19.07, and Rs. 19.52 per share. 

Post-IPO, GAL's current paid-up equity capital of Rs. 17.11 cr. will stand enhanced to Rs. 23.27 cr. Based on the upper cap of the IPO price band, the company is looking for a market cap of Rs. 202.47 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, perhaps we are witnessing for the first time the financial data from FY20 to FY22 on a consolidated basis and for 3Qs of FY23 on a standalone basis. As per the financial details given in the RHP, it has posted (on a consolidated basis) a turnover/net profit of Rs. 238.07 cr. / Rs. 1.12 cr. (FY20), Rs. 239.29 cr. / Rs. 2.51 cr. (FY21), and Rs. 337.05 cr. / Rs. 0.77 cr. (FY22). For 3Qs of FY23 (on a standalone basis), it has earned a net profit of Rs. 10.22 cr. on a turnover of Rs. 256.33 cr.  There appears to be some window dressing to pave the way for fancy pricing of the IPO. 

Its RoE remained highly volatile and marked 2.33% (FY20), 5.05% (FY21), and 1.49% (FY22). For 3Qs of FY23 (18.19%). Similarly, its RoCE was 5.78% (FY20), 6.76% (FY21), and 4.04% (FY22). For 3Qs of FY23, RoCE stood at 12.52%. The sudden spurt in its margins for 3Qs of FY23 raises eyebrows and concerns over sustainability. 

For the last three fiscals, GAL has reported an average EPS of Rs. 0.92 and an average RoNW of 2.77%. The issue is priced at a P/BV of 2.46 based on its NAV of Rs. 35.43 as of December 31, 2022, and at a P/BV of 1.92 based on its post-IPO NAV of Rs. 45.26 per share (at the upper cap).

Its borrowings have increased from Rs. 39.16 cr. (FY20) to 66.83 cr. (FY22) and to Rs. 60.27 cr. (3Qs - FY23). This will take major outgo as a finance cost. 

If we annualized super earnings of FY23 and attribute it to post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of around 14.87, making it a fully priced IPO, but based on its FY22 earnings, the P/E stands at 263.64 making it aggressively priced issue. 

DIVIDEND POLICY:
The company has not declared any dividends for the reported periods of the 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 document, the company has shown TTK Prestige, Hawkins Cookers, Stove Kraft, and Butterfly Gandhimathi as their listed peers. They are currently trading at a P/E of 39.84, 35.47, 41.16, and 40.77 (as of June 20, 2023). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
This is the 24th mandate from Hem Securities in the last three fiscals (including the ongoing one). Out of the last 10 listings, all were listed at premiums ranging from 1.81% to 166.67% on the listing date. 

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