Italian Edibles NSE SME IPO review (Avoid)

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Review By Dilip Davda on January 29, 2024

•    IEL is in the business of confectioneries and other food products. 
•    The company sells its products under the brand name "Ofcour's". 
•    It operates in a highly competitive and fragmented segment. 
•    Based on its annualized super earnings for FY24, the issue appears fully priced. 
•    There is no harm in skipping this IPO.

ABOUT COMPANY:
Italian Edibles Ltd. (IEL) is a manufacturer and supplier of Confectionery products. It in a broader sense implies the preservation of sweet delicacy preparation in the form of candies, caramels, chocolate, processed cocoa and milk and traditional Indian confections. Keeping in mind the company's mantra "Sharing is Everything" and "Delightful Creation and Boundless Joy", the company has been manufacturing delicious mouthwatering confectionery products for the last 14 years.

Its confectionery products are sold under the brand name of "Ofcour's" It offers a wide range of confectionery's such as Rabdi [Meethai Sweet], Milk Paste, Chocolate Paste, Lollipops, Candies, Jelly Candies, Multi-Grain Puff Rolls, Fruit Based Products to customers. India being a country with different cultures, many festivals and occasions, celebration with confectioneries plays a major role in those special occasions, festivals etc.

IEL's confectionery products are sold PAN India, majorly in rural and semi-urban areas of Andhra Pradesh, Assam, Bihar, Chhattisgarh, Delhi, Gujarat, Haryana, Himachal Pradesh, Jammu & Kashmir, Jharkhand, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Odisha, Punjab, Rajasthan, Tamil Nadu, Telangana, Uttar Pradesh, Uttarakhand, West Bengal and through local wholesalers and distributors located in these areas. 

IEL's consumer segments largely include teenagers, young adults and children's located in rural and semi-urban areas of India. Apart from selling its confectionery products within India, it also exports to various countries such as Nigeria, Yemen, Senegal and Sudan.

As of August 31, 2023 its top customers include Chocolate World, Yuvraj Agency, Bakewell Biscuits Private Limited, R. K. Prabhavati Traders, Mamta Stores, Ma Laxmi Traders, Suria Distributor etc. Also, one of its product, i.e., Jelly Candies are sold to Dharpal Premchand Ltd (BABA) group.

As of August 31, 2023, it had approximately 450 Suppliers and distributors located across 22 states in India and have exported products through network of 5 merchant exporters. Its distribution network within India and outside India and well-established brand has enabled it to effectively manage marketing strategy, market penetration and thereby increase turnover over the years.

It has two operational manufacturing unit that is operated by it and are located in Gram Palda, Indore and Prabhu Toll Kanta, Indore (Madhya Pradesh). IEL sells confectionery products in retail and wholesale packs. Lollipops, Candies, milk sweetmeat products are available in Pet Jars, polypacks and
cardboard boxes.  As of August 31, 2023, it had 227 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden IPO of 3920000 equity shares of Rs. 10 each at a fixed price of Rs. 68 per share to mobilize Rs. 26.66 cr.  The issue opens for subscription on February 02, 2024, and will close on February 07, 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 26.53% of the post-IPO paid-up capital of the company. The company is spending Rs. 0.80 cr. for this IPO process and from the net proceeds it will utilize Rs. 8.00 cr. for setting up of proposed manufacturing unit, Rs. 6.15 cr. for repayment of certain borrowings, Rs. 6.00 cr. for working capital and Rs. 5.71 cr. for general corporate purposes. 

The issue is solely lead managed by First Overseas Capital Ltd.(FOCL), and Bigshare Services Pvt. Ltd. is the registrar of the issue. Nikunj Stock Brokers Ltd.(NSBL) is the market maker for the company. While FOCL has underwritten the IPO up to 15%, NSBL has underwritten to the tune of 85%.

Having issued initial equity capital at par, it issued further equity shares at a fixed price of Rs. 60 per share in March 2022.The company has also given bonus shares in the ratio of 16 for 3 in August 2023. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 2.39, and Rs. 2.73 per share.

Post-IPO, company's current paid-up equity capital of Rs. 10.86 cr. will stand enhanced to Rs. 14.78 cr. Based on the upper IPO price band, the company is looking for a market cap of Rs. 100.49 cr.  

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has posted a total income/net profit of Rs. 48.99 cr. / Rs. 0.87 cr. (FY21), Rs. 75.45 cr. / Rs. 0.80 cr. (FY22), and Rs. 63.30 cr. / Rs. 2.64 cr. (FY23). For 5M of FY24 ended on August 31, 2023, it earns a net profit of Rs. 2.10 cr. on a total income of Rs. 30.52 cr. Thus its top line has posted degrowth from FY23 onwards, while its bottom line is cooked up perhaps to match the asking price. 

For the last three fiscals, it has reported an average EPS of Rs. 1.60, and an average RONW of 18.00%. The issue is priced at a P/BV of 5.73 based on its NAV of Rs. 11.86 as of August 31, 2023, and at a P/BV of 2.54 based on its post-IPO NAV of Rs. 26.75 per share (at the upper cap).

If we attribute annualized FY24 earnings to its post-IPO fully diluted paid-p capital, then the asking price is at a P/E of 19.94. Thus the issue appears fully priced with boosted annualized FY24 earnings. 

For the reported periods, the company has posted PAT margins of 1.77% (FY21), 1.06% (FY22), 4.17% (FY23), 6.87% (5M-FY24), and RoCE margins of 9.17%, 12.16% 19.32%, 11.55% respectively for the referred periods. 

DIVIDEND POLICY:
The company has not declared any dividends since incorporation. 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 Lotus Chocolate and Tapi Fruit as their listed peers. They are trading at a P/E of NA and 279 (as of January 29, 2024). However, they are not comparable on an apple-to-apple basis.

MERCHANT BANKER'S TRACK RECORD:
This is the 25th mandate from First Overseas in the last three fiscals, out of the last 10 listings, 3 opened at par and the rest with premiums ranging from 0.04% to 18.68% on the date of listing. 

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