Lead Reclaim NSE SME IPO review (Avoid)

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Review By Dilip Davda on February 7, 2023

•    LRRPL is in the business of manufacturing reclaimed rubber, crumb rubber power and rubber granules. 
•    It has posted inconsistency in its top and bottom lines for the reported periods. 
•    Based on H1-FY23 earnings, the issue is aggressively priced. 
•    It is operating in a highly competitive segment. 
•    There is no harm in skipping this pricey issue. 

ABOUT COMPANY:
Lead Reclaim and Rubber Products Ltd. (LRRPL) is engaged in the business of manufacturing reclaimed rubber, crumb rubber powder and rubber granules. It focuses on a) saving valuable natural resources by way of recycling and b) helping customers fulfil their circularity aspirations through the use of reclaimed rubber products. 

LRRPL's manufacturing facility employs an extensive and stringent quality control mechanism at each stage of the recycling process to ensure that the finished product conforms to the exact requirement of customers. 

Its Product Portfolio offers a diversified product range which includes a variety of grades, thicknesses, widths and standards of various grades of whole tyre reclaim rubber, butyl reclaim rubber and natural reclaimed rubber. Currently, the company sells products to companies in the automotive manufacturing sector, distributors and dealers. It also sells products to foreign buyers located in Sri Lanka, Argentina, Turkey, China, etc. through merchant exporters. As of the filing of this offer document, it had 25 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden IPO of 1950000 equity shares of Rs. 10 each at a fixed price of Rs. 25 per share to mobilize Rs. 4.88 cr. The issue opens for subscription on February 09, 2023, and will close on February 13, 2023. The minimum application to be made is for 6000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 26.56% of the post-IPO paid-up capital of the company. LRRPL is spending Rs. 0.60 cr. for this IPO and from the net proceeds, it will spend Rs. 1.02 cr. for working capital, Rs. 2.16 cr. for the purchase of plant and machinery for augmenting its manufacturing facility, and Rs. 1.10 cr. for general corporate purposes. 

Fedex Securities Pvt. Ltd. is the sole lead manager for this issue and Bigshare Services Pvt. Ltd. is the registrar of the issue. SVCM Securities Pvt. Ltd. is the market maker of the company. 

Having issued initial equity shares at par value, the company issued further equity shares in the price range of Rs. 25 - Rs. 180 per share between September 2014 and October 2022. It has also issued bonus shares in the ratio of 55 for 100 in October 2022. The average cost of acquisition of shares by the promoters is Rs. 9.78, Rs. 9.96, Rs. 10.26, Rs. 11.77, Rs. 16.34, and Rs. 43.01 per share. 

Post-IPO, LRRPL's current paid-up equity capital of Rs. 5.39 cr. will stand enhanced to Rs. 7.34 cr. Based on the upper cap of the issue price, the company is looking for a market cap of Rs. 18.35 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, LRRPL has posted a turnover/net profit of Rs. 4.84 cr. / Rs. 0.36 cr. (FY20), Rs. 7.06 cr. / Rs. 0.23 cr. (FY21), and Rs. 10.37 cr. / Rs. 0.48 cr. (FY22). For the H1 of FY23, it earned a net profit of Rs. 0.36 cr. on a turnover of Rs. 4.99 cr. Thus it has marked inconsistency in its top and bottom lines. 

For the last three fiscals, LRRPL has reported an average EPS of Rs. 5.88 and an average RoNW of 61.82%. The issue is priced at a P/BV of 1.91 based on its NAV of Rs. 13.06 as of March 31, 2022, and at a P/BV of 1.76 based on its post-IPO NAV of Rs. 14.21 per share.  The offer document is missing data on its NAV as of September 30, 2022. 

If we annualize FY23 earnings and attribute it to post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 25.77 and on the basis of FY22 earnings, it is at a P/E of 38.46. Thus the issue is aggressively priced. 

DIVIDEND POLICY:
The company has not declared any dividends since incorporation. It will adopt a prudent dividend policy post-listing, based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per the offer document, the company has shown GRP Ltd. as their listed peer. It is currently traded at a P/E of 45.80 (as of February 07, 2023). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
This is the 14th mandate from Fedex Securities in the last three fiscals (including the ongoing one). Out of the last 10 listings, 1 opened at discount, 2 at par and the rest with premiums ranging from 0.08% to 108.93% on the day of listing.

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