Krishna Defence NSE SME IPO review (May apply)

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Review By Dilip Davda on March 24, 2022

•    KDAIL is engaged in the business of defence/dairy/kitchen related products.
•    The company has posted inconsistent financial performance for the reported periods.
•    Competition is on the rise in most of its segments.
•    Sustainability of margins in coming years is a major concern. 

ABOUT COMPANY:
Krishna Defence and Allied Industries Ltd. (KDAIL) [Erstwhile known as Krishna Allied Industries Ltd.) is engaged in the diversified business of manufacturing defence application products, dairy equipment products and kitchen equipment. It has entered into various licensing agreements with Defence Research and Development Organization ("DRDO") for obtaining the know-how and rights which enable it to manufacture and supply specialized defence application products for the Indian Armed Forces. 

Under defence application, KDAIL provides a wide array of high-performance products for naval applications and other utilities such as shipbuilding steel bulb bar, special steel alloy bricks used as ballast weight for critical applications, superalloys weld consumables like welding wire, flux and electrodes, food container and improved space heating device, which is also known as Bukhari. 

In 1997, it started operations in dairy equipment manufacturing as a partnership firm, M/s Krishna Industries and over the years it has developed a wide range of dairy equipment products such as stainless steel milk Cans, Milk Cooling Tanks or Bulk Milk Coolers, Milking Machine, Cow Brooming Brush and Robotic Milk Collection Unit. 

The Company achieved a new milestone in 2015 in the dairy industry after acquiring a patent for the invention of automated milk analysis and collection apparatus called Robotic Milk Collection Unit (RMCU) that is valid till 2035. The developed product works like a kiosk for Milk Collection for Milk Society, and it analyzes the farmer milk not only for Fat & SNF but also tests the milk for adulteration. The RMCU ensures only top-quality milk is collected by the Milk Society and below-par milk or adulterated milk is rejected. 

In the year 2010, it stretched operations into the business of manufacturing Kitchen Equipment and commenced manufacturing of Bulk Cooking Equipment like Rice Cauldron, Dal Cauldron, Braising Pan, Distribution Vessels, Rice Chute, Dal Storage Tank, which are used by organizations that run Midday Meal Programs where cooking is done for up to 1,00,000 meals a day. Presently it is supplying such products to The Akshaya Patra Foundation.

In the year 2020 KDAIL has also forayed into a new business vertical of manufacturing and marketing of Homeland & Security products, wherein it plans to manufacture products like Modular Vehicle Barrier, Automatic tyre Killer, Multi-purpose Launcher and Long-Range LED Searchlight used by the Indian Armed Forces, for which it has entered into agreements with foreign vendors for import of critical component required to manufacture/assemble these products in its factory. The company has two manufacturing facilities in Gujarat, located at Kalol and Halol district near Vadodara. Off late competition in most of the segments is a major concern. As of December 31, 2021, it had 209 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its need for working capital (Rs. 9.00 cr.), general corporate purpose, KDAIL is coming out with a maiden IPO via book building route. The company is offering 3048000 equity shares of Rs. 10 each in a price band of Rs. 37 - Rs. 39. At the upper cap of the price band, it mulls mobilizing Rs. 11.89 cr. The issue opens for subscription on March 25, 2022, and will close on March 29, 2022. The minimum application to be made is for 3000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 26.62% of the post issue paid-up capital of the company. The company has allocated 50% for QIBs, 15% for HNIs and 35% for Retail investors. 

The issue is solely lead managed by Hem Securities Ltd., and Bigshare Services Pvt. Ltd. is the registrar to the issue.  Hem Finlease Pvt. Ltd. is the market maker for the company. 

Having issued initial equity at par, KDAIL issued further equity at Rs. 12.50 per share in February and March 2016. It has also issued bonus shares in the ratio of 1 for 1 in September 2021. The average cost of acquisition of shares by the promoters is Rs. 5.25 per share. 

Post-IPO, KDAIL's current paid-up equity capital of Rs. 8.40 cr. will stand enhanced to Rs. 11.45 cr. Based on the upper cap of IPO pricing, the company is looking for a market cap of Rs. 44.65 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, KDAIL has posted turnover/net profits of Rs. 58.91 cr. / Rs. 2.06 cr. (FY19), Rs. 25.72 cr. / Rs. 0.75 cr. (FY20), Rs. 36.19 cr. / Rs. 1.94 cr. (FY21). For the first half of FY22 ended on September 30, 2022, it has earned a net profit of Rs. 1.22 cr. on a turnover of Rs. 20.98 cr. Thus, it has posted inconsistency in its top and bottom lines for these periods. 

According to management, for FY19, their trading activities contributed around Rs. 25 cr. in the top line. They discontinued trading from FY20 and have focused only on the three segments that they are currently in. Due to this and the general trends for the segments coupled with Pandemic, they suffered a minor setback for FY20 and FY21. 

For the last three fiscals, it has posted an average EPS of Rs. 1.86 and an average RoNW of 9.16%. The issue is priced at a P/BV of 1.70 based on its NAV of Rs. 22.92 as of September 30, 2021, and at a P/BV of 1.49 based on its post-IPO NAV of Rs. 26.13 (at the upper cap). 

If we annualize FY22 earnings and attribute it to the fully diluted equity post IPO, then the asking price is at a P/E of around 18. Thus, the issue appears fully priced. 

COMPARISON WITH LISTED PEERS:
As per offer documents, the company has no listed peers to compare with. 

DIVIDEND POLICY:
The company has not declared any dividends for the last five years. It will adopt a prudent dividend policy post listing based on its financial performance and future prospects. 

MERCHANT BANKER'S TRACK RECORD:
The merchant banker Hem Securities has handled 13 public issues in the last three fiscals, out of which 2 issues closed below the offer price on the day of listings.

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