Kalana Ispat NSE SME IPO review (May apply)

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Review By Dilip Davda on September 17, 2024

•    The company is engaged in the business of trading/manufacturing of metal related products.
•    After the static bottom lines for FY21 and FY22, it posted growth in its top and bottom lines for FY23 and FY24.
•    Its future growth in earnings hinges with installation of solar power plant.
•    Based on FY24 earnings, the issue appears aggressively priced.
•    Well-informed Investors may park fund for long term. 

PREFACE:
Though this IPOs prospectus is dated September 12, 2024, it was made available only on the eve of September 16, 2024 through agency, but were not available on the web site of the designated exchange or the merchant banker till this morning i.e. September 17, 2024 till 11.00 am. This is how now a day; we are witnessing the process of SME IPOs in particular.  

ABOUT COMPANY:
Kalana Ispat Ltd. (KIL) was engaged in trading metal scraps, which were procured through imports from various countries, sourced from shipbreaking yards and local merchants. As the business progressed, the Company ventured into manufacturing M.S. Billets and set up its manufacturing unit in Ahmedabad, Gujarat in the year 2015. Today, the Company is engaged in manufacturing M.S. Billets and Alloy Steel Billets/Ingots.

KIL is primarily engaged in manufacturing of M.S. Billets and Alloy Steel Billets of various grades. Its manufacturing facility has been duly certified in accordance with international standards of quality management systems such as ISO 2830:2012. The Company operates in two major segments, viz. Sale of Products, and Sale of Services.

It engages in sale of products manufactured by it and sale of traded goods. The sub-segment sale of Manufacturing Goods pertains to the sale of the products manufactured by the Company, viz. M.S. Billets and Alloy Steel Billets of various grades, these are the good manufacture by it for sale directly to its customers on order basis. Apart from selling of the manufactured goods, the Company often capitalizes on sale of traded goods, the Company generally trades in goods such as iron scrap, iron ore and ingots.

The Company, based on the spare capacity available with it, often undertakes job work for casting of M.S. Billets and/or Alloy Steel Billets, on behalf of its client companies. When the company does not have sufficient order to the extent of installed capacity of caster, then its spare capacity of the caster is used for production on job work basis. Under the sale of services, i.e. job work segment of the Company, the raw material is supplied by the clients and the Company solely provides the casting services, for which it charges services cost from the client. As of the date of this offer document, it has overall 18 employees on its payroll.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden IPO of 4938000 equity shares of Rs. 10 each at a fixed price of Rs. 66 per share to mobilize Rs. 32.59 cr. The issue opens for subscription on September 19, 2024, and will close on September 23, 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 37.87% of the post-IPO paid-up capital of the company. The company is spending Rs. 1.00 cr. for this IPO process and from the net proceeds, the company will utilize Rs. 22.99 cr. for installing ground mounted solar power plant of 3.5 MW/ 4 MW DC, Rs. 7.99 cr. for capex on setting up of rolling mill, and Rs. 0.61 cr. for general corporate purposes.

The issue is solely lead managed by Jawa Capital Services Pvt. Ltd.., Skyline Financial Services Pvt. Ltd. Is the registrar to the issue, while Aftertrade Broking Pvt. Ltd. Is the market maker for the company. The issue is underwritten to the tune of 84.97% by Jawa Capital and up to 15.03% by Aftertrade Broking.

Having issued initial equity shares at par, the company issued further equity shares at a fixed price of Rs. 81 per share in November 2023. It also issued bonus shares in the ratio of 88 for 20 in November 2023. The average cost of acquisition of shares by the promoters is Rs. 3.13, Rs. 4.55, Rs. 4.72, and Rs. 4.79 per share. 

Post-IPO, company's current paid-up equity capital of Rs. 8.10 cr. will stand enhanced to Rs. 13.04 cr. Based on the upper cap of IPO price band, the company is looking for a market cap of Rs. 86.08 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last four fiscals, the company has posted a total income/net profit of Rs. 42.98 cr. / Rs. 0.14 cr. (FY21), Rs.  57.93 cr. / Rs. 0.14 cr.  (FY22), Rs. 83.36 cr. / Rs. 0.50 cr. (FY23), and Rs. 73.95 cr. / Rs. 2.37 cr. (FY24).  

For the last three fiscals, it has reported an average EPS of Rs. 3.41 and an average RoNW of 15.32%. The issue is priced at a P/BV of 4.76 based on its NAV of Rs. 13.87 as of March 31, 2024, and at a P/BV of 1.94 based on its post-IPO NAV of 34.08 per share.

If we attribute FY24 super earnings to its post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 36.26. Based on FY23 earnings, the P/E stands at 169.23. Thus the issue relatively appears aggressively priced. Super performance in a pre-IPO year raises eyebrows and concern over its sustainability, as the company is operating in a highly competitive and fragmented segment. 

The company reported PAT margins of 0.32% (FY21), 0.27% (FY22), 0.61% (FY23), 3.21% (FY24), and RoCE margins of 5.38%, 6.31%, 8.33%, 21.20% for the referred periods, respectively.

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.

COMPARISION WITH LISTED PEERS:
As per the offer document, the company has shown Supershakti Metaliks, Incredible Ind., and Gallantt Ispat, as their listed peers. They are trading at a P/E of 31.7, 33.8, and 29.0 (as of September 17, 2024). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
This is the 3rd mandate from Jawa Capital in the ongoing fiscal. Out of the last two listings, 1 opened at a discount and the 1 with a premium of 50% on the date of listing.

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