Kaka Ind BSE SME IPO review (May apply)

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Review By Dilip Davda on July 6, 2023

•    KIL is engaged in the manufacturing and marketing of polymer-based profiles.
•    It posted steady growth in its top and bottom lines for the reported periods.
•    Based on FY23 financial data, the issue appears reasonably priced. 
•    It is operating in a highly competitive and fragmented segment. 
•    Well-informed investors may consider parking funds for medium to long-term rewards. 

ABOUT COMPANY:
Kaka Industries Ltd. (KIL) is a PVC profile brand, focused primarily on the manufacturing of polymer-based profiles which finds application in doors, windows, partitions, false ceilings, wall panelling, kitchen cabinets & other interior and exterior works. Its product portfolio has over 1200 SKUs covering PVC Profile, uPVC door & window profile, WPC Profile & sheet in various sizes, specifications and colours. The company is also engaged in the fabrication of factory-made PVC & Solid PVC doors. Except for WPC (Wood-polymer composite) profile and doors, all its products are non-wood based, which substitutes wood products and results in the saving of trees.

KIL markets products through an extensive network of 300 dealers spread across over 20 States and Union Territories of India. As of the date of this Red Herring Prospectus, its distribution network comprises 3 depots situated in Gagilapur (Telangana), Dadri (Uttar Pradesh) and Surat (Gujarat). It has brands in the name of Kaka, Poly Plast, Jinwin, Nice Plast and Barbarika under which it sells products. For the Fiscal 2023, the company derived a major portion of revenue from the state of Gujarat (i.e. 63.73%), followed by Telangana (8.67%), Maharashtra (7.49%), Karnataka (4.61%) and the remaining 15.50% were from other 19 states & union territories. 

The company is also empanelled as an "Approved Vendor" in two of the Government Organizations namely, Gujarat State Police Housing Nigam Limited and Military Engineer Services (Lucknow & Ahmedabad). As of the date of this Red Herring Prospectus, it has three manufacturing units in village Zak, Gandhinagar district, Gujarat, which has a combined installed capacity of 15425 MT for manufacturing PVC profile, 2995 MT for WPC profile & sheet, 2022 MT for uPVC door & window profile. 

KIL is currently in the process of setting up a new manufacturing plant in the village of Lasundra, Kheda district (Gujarat), in order to increase its manufacturing capabilities. The land on which the said plant is being constructed comprises over 49,000 sq. mtrs. area obtained on lease from Promoter Director with a 30 years lease period valid till March 2053. Surprisingly, KIL has given its manpower data as of February 28, 2023, with 199 employees on the payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden IPO of 3660000 equity shares of Rs. 10 each via a book-building route with a price band of Rs. 55 - Rs. 58 per share. It mulls mobilizing Rs. 21.23 cr. at the upper cap of the price band. The issue opens for subscription on July 10, 2023, and will close on July 12, 2023. The minimum application to be made is for 2000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. The issue constitutes 26.79% of the post-issue paid-up capital of the company. From the net proceeds of the IPO funds, KIL will utilize Rs. 7.75 cr. for working capital, Rs. 7.30 cr. for repayment/prepayment of certain borrowings, and the balance for general corporate purposes.  

The company has reserved up to 192000 shares for market maker, and from the rest, it allocated not more than 50% for QIBs, not less than 15% for HNIs and not less than 35% for Retail investors.   

Hem Securities Ltd. is the sole lead manager and Bigshare Services Pvt. Ltd. is the registrar of the issue. HEM group's Hem Finlease Pvt. Ltd. is the market maker for the company. 

Having issued initial equity shares at par value, it issued further equity shares at a price of Rs. 30.00 per share in March 2021 and has also issued bonus shares in the ratio of 3 for 1 in February 2023. The average cost of acquisition of shares by the promoters is Rs. 2.90, Rs. 6.17, and Rs. 9.25 per share. 

Post-IPO, KIL's current paid-up equity capital of Rs. 10.00 cr. will stand enhanced to Rs. 13.66 cr. (13660000 shares). Based on the upper cap of the IPO price, the company is looking for a market cap of Rs. 79.23 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, KIL has posted a turnover/net profit of Rs. 78.79 cr. / Rs. 3.03 cr. (FY21), Rs. 117.10 cr. / Rs. 4.98 cr. (FY22), and Rs. 158.88 cr. / Rs. 7.19 cr. (FY23). Thus it has posted steady growth in its top and bottom lines. 

For the last three fiscals, KIL has reported an average EPS of Rs. 6.02 and an average RoNW of 38.50%. The issue is priced at a P/BV of 2.96 based on its NAV of Rs. 19.57 as of March 31, 2023, and at a P/BV of 1.94 based on its post-IPO NAV of Rs. 29.87 per share (at the upper cap).

If we attribute FY23 earnings to the post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 11.03, making it a reasonably priced IPO. 

DIVIDEND POLICY:
The company has not declared any dividends for the reported periods of the offer document. 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 Dhabriya Plywood, and Sintex Plastics as their listed peers. They are currently trading at a P/E of 74.64, and 00 (as of July 06, 2023). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
This is the 25th 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 1.82% to 166.67% on the listing date.

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