Madhusudan Masala NSE SME IPO review (May apply)

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Review By Dilip Davda on September 14, 2023

•    MML is engaged in the business of manufacturing and processing spices.
•    It is operating in a highly competitive and fragmented segment. 
•    The sudden boost in its top and bottom lines for FY23 raises eyebrows and concern over its sustainability.
•    Based on FY23 super earnings, the issue appears fully priced. 
•    Well-informed/cash surplus investors may park funds for medium to long-term rewards.

ABOUT COMPANY:
Madhusudan Masala Ltd. (MML) is engaged in the business of manufacturing and processing more than 32 types of Spices under the brand names "DOUBLE HATHI" and "MAHARAJA". It also sells products like Whole Spices, Tea and Other Grocery Products like Rajgira flour, Papad, Soya Products, Asafoetida (Hing), Achar masala (Ready to make pickle powder), Sanchar (Black salt powder), Sindhalu (Rock salt powder), Katlu powder (Food supplement), Kasuri Methi (Dry fenugreek), etc. under the brand name of "DOUBLE HATHI". 

Furthermore, the company also generates revenue from the trading of whole spices and food grains through unbranded sales. It has been selling products under the brand name of "DOUBLE HATHI" since 1977 and under the brand name of "MAHARAJA" since 2003. MML's range of spices includes (i) Ground spices which comprise of various varieties of Chilli Powder, Turmeric Powder, Coriander Powder and Coriander Cumin Powder and (ii) Blend spices which comprise Garam Masala, Tea Masala, Chhole Masala, Sambhar Masala, Pav Bhaji Masala, Pani Puri Masala, Sabji Masala, Kitchen King Masala, Chicken Masala, Meat Masala, Chatpata Chat Masala, Butter Milk Masala, Chewda Masala, Dry Ginger Powder (Sunth), Black Pepper Powder (Mari), Dry Mango Powder (Aamchur), etc. The company also deals in whole spices in retail and bulk quantities. 

Sales of its own brands have declined from 70.20% for FY21 to 47.18% for FY23 and Other sales marked growth from 29.80% for FY21 to 52.82% for FY23. The company is operating in a highly competitive and fragmented segment. 

As of March 31, 2023, the Company has 29 employees on its payroll and approximately 80 daily wage workers at the manufacturing unit.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden IPO of 3400000 equity shares of Rs. 10 each via book-building mode. It has announced a price band of Rs. 66 - Rs. 70 per share of Rs. 10 each and mulls mobilizing Rs. 23.80 cr. at the upper cap. The issue opens for subscription on September 18, 2023, and will close on September 21, 2023. 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 26.36% of the post-IPO paid-up capital of the company. From the net proceeds of the IPO money, it will utilize Rs. 16.00 cr. for working capital, and the rest for general corporate purposes. 

After reserving 172000 shares for market maker, the company has allocated not more than 1612000 shares for QIBs, not less than 486000 shares for HNIs and not less than 1130000 shares for Retail investors. 

Hem Securities Ltd. is the sole lead manager and KFin Technologies 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, the company issued further equity shares at a fixed price of Rs. 100 per share in July 2023. It has also issued bonus shares in the ratio of 4 for 5 in July 2023. The average cost of acquisition of shares by the promoters is Rs. 0.00, and Rs. 31.25 per share. 

Post-IPO, MML's current paid-up equity capital of Rs. 9.50 cr. will stand enhanced to Rs. 12.90 cr. Based on the upper price band of the IPO, the company is looking for a market cap of Rs. 90.30cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, MML has posted a total revenue / net profit of Rs. 68.75 cr. / Rs. 0.45 cr. (FY21), Rs. 66.52 cr. / Rs. 0.81 cr. (FY22), and Rs. 127.51 cr. / Rs. 5.76 cr. (FY23). Boosted performance for FY23 appears to be a window dressing to pave the way for fancy pricing of the IPO. The sustainability of such fancy margins going forward raises concern. 

For the last three fiscals, MML has reported an average EPS of Rs. 10.03 and an average RoNW of 114.11%. The issue is priced at a P/BV of 5.29 based on its NAV of Rs. 13.24 per share as of March 31, 2023, and at a P/BV of 2.60 based on its post-IPO NAV of Rs. 26.97 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 15.70. Thus the issue appears fully priced based on its super earnings for FY23.

For the last three fiscals, the company has posted PAT margins of 0.65% (FY21), 1.24% (FY22), and 4.53% (FY23). 

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, MML has shown NHC Food as their listed peer. It is trading at a P/E of 28.92 (as of September 13, 2023). However, they are not truly comparable on an apple-to-apple basis. The nearest peer recently listed Srivari Spices is trading at a P/E of 29.66 (13.09.23)

MERCHANT BANKER'S TRACK RECORD:
This is the 28th mandate from Hem Securities in the last three fiscals (including the ongoing one). Out of the last 10 listings, all are listed with premiums ranging from 1.82% to 90% on the date of listing. 

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