Kalahridhaan Trendz NSE SME IPO review (May apply)

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Review By Dilip Davda on February 12, 2024

•    The company is in the business of manufacturing and trading of fabrics with embroidery works primarily in B2B segment. 
•    It posted static top line for FY22 and FY23, but its net profit marked miracle for FY23.
•    The company is operating in a highly competitive and fragmented segment.
•    Based on super annualized profits for FY24, the issue appears reasonably priced.
•    Well-informed/cash surplus investors may park funds for the medium term. 

ABOUT COMPANY:
Kalahridhaan Trendz Ltd. (KTL) is engaged mainly in the business of manufacturing and trading of Fabric with embroidery works, trading of grey cloths, purchase of grey cloth and printing and dyeing for preparing suiting, shirting and dress materials for sale it in the B2B market only. The company is preparing the suiting, shirting & dress material products and focus on the whole sale market. 

It is the first stage wholesalers, who directly supply the material to the wholesalers. In case of Embroidery Segment, the Company undertakes the embroidery work for its own business as well as on behalf of the other clients. In addition to this KTL also gets embroidery work out sourced. The company also deals in purchase and sell of grey cloths as well as the suiting, shirting and dress materials. 

It has two embroidery knitting machines having capacity of 15000 meters per day. As a part of expansion of business activities, and as a part of forward integration, the company also taken over the textile Dying and printing business unit on rent basis in February, 2018, where it is carrying out the dying and printing of suiting, shirting and dress materials for own use as well as on job work too.

Its main business activities can be mainly divided in to two segments - Embroidery Knitting activities, and - Cloths dying and Printing activities. As of December 31, 2023, it had 277 employees including 265 contract labour. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden IPO of 4998000 equity shares of Rs. 10 each at a fixed price of Rs. 45 per share to mobilize Rs. 22.49 cr. The issue opens for subscription on February 15, 2024, and will close on February 20, 2024. The minimum application to be made is for xxx shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 29.08% of the post-IPO paid-up capital of the company. The company is spending Rs. 1.07 cr. for this IPO and from the net proceeds it will utilize Rs. 16.07 cr. for working capital, and Rs. 5.35 cr. for general corporate purposes. 

The issue is solely lead managed by Interactive Financial Services Ltd., and Bigshare Services Pvt. Ltd. is the registrar of the issue. Sunflower Broking Pvt. Ltd. is the market maker for the company. The issue is underwritten 15% by Interactive and 85% by Sunflower Broking.

Having issued initial equity capital at par, the company issued further equity shares at a fixed price of Rs. 20 per share between December 2017 and August 2018. It has also issued bonus shares in the ratio of 7 for 10 in January 2019, and 1 for 1 in July 2023. The average cost of acquisition of shares by the promoters is Rs. 4.78, Rs. 5.66, and Rs. 5.88 per share.

Post-IPO, company's current paid-up equity capital of Rs. 12.19 cr. (12189000 shares) will stand enhanced to Rs. 17.19 cr. (17187000 shares). Based on the upper IPO price band, the company is looking for a market cap of Rs. 77.34 cr.  

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has) posted a total revenue/net profit of Rs. 132.36 cr. / Rs. 1.11 cr. (FY21), Rs. 183.91 cr. / Rs. 2.46 cr. (FY22), and Rs. 184.17 cr. / Rs. 6.66 cr. (FY23). For H1 of FY24 ended on September 30, 2023, it earns a net profit of Rs. 4.79 cr. on a total revenue of Rs. 84.35 cr. For the last two fiscals, its top line remained static, but its bottom line boosted for FY23 and for H1 of FY24, that nor only raise eyebrows, but also concern over its sustainability going forward. 

For the last three fiscals, it has reported an average EPS of Rs. 4.92. The offer document is missing average RoNW data for the last three fiscals. The issue is priced at a P/BV of 2.39 based on its NAV of Rs. 18.80 as of September 30, 2023 and at a P/BV of 1.70 based on its post-IPO NAV of Rs. 26.42. 

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 8.08. Thus the issue appears reasonably priced with super profits earned for the period. Based on FY23 earnings the P/E comes to 11.63. 

For the reported periods, the company has posted PAT margins of 0.84% (FY21), 1.34% (FY22), 3.62% (FY23), and RoCE margins of 10.16%, 10.35%, 17.39%, respectively. However, this data is missing H1-FY24 data related to PAT and RoCE margins. 

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 SPL Ind., Kitex Garments, and Monte Carlo Fashion as their listed peers. They are trading at a P/E of 17.1, 43.6 and 13.7 (as of February 12, 2024). However, they are not comparable on an apple-to-apple basis.

MERCHANT BANKER'S TRACK RECORD:
This is the 14th mandate from Interactive Financial in the last three fiscals, out of the last 10 listings 3 opened at discount, 2 at par and the rest with premiums ranging from 1.46% to 20.74% on the date of listing.

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