Neelam Linens NSE SME IPO review (Avoid)

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Review By Dilip Davda on November 5, 2024

•    The company is engaged in the business of trading and processing of home furnishing products, related services and sale of import licenses.
•    The company posted though static, but inconsistent financial performance for reported periods. 
•    Based on FY25 annualised super earnings, the issue appears fully priced. 
•    Higher debt raises major concern as its debt-equity ratio is 3.12 as of June 30, 2024.
•    The company operates in a highly competitive and fragmented segment. 
•    There is no harm in skipping this "High Risk/Low Return" bet. 

ABOUT COMPANY:
Neelam Linens & Garments (India) Ltd. (NLGIL) is in the business of processing and trading of products, sale of licenses. It operates as a soft home furnishing company based out of Maharashtra, India, extending its services to a global clientele, including USA, Australia and Far East. The company specializes in the processing, finishing and supplying of bedsheets, Pillow cover, Duvet Cover, Towels, Rugs, Doher, Shirts & Garments predominantly for discounted retail outlets. It sources surplus or slightly imperfect fabric from the domestic market, applying value-added services such as designing, digital printing, dyeing, stitching, embroidery, and other enhancements. Subsequently, it distributes these refined products to discounted retail outlets in diverse countries.

The company entered the apparel industry by starting an in-house production of men's and women's fashion apparel since 2023. It also earns revenue from sale of import licenses. An import license is a governmental authorization required for the imports of goods that are not freely importable. Licenses of this form restrict the number of items entering a country to exactly the requirements of those products and the country's customs regulations. The government primarily offers the licenses as a financial incentive to exporters, and once granted, they become commodities. Import licenses, which grant the holder the right to import goods that may be restricted or regulated, are considered a service when they are sold or transferred.

The sale of license business of the Company can be bifurcated into two parts, i.e. sale of the import license received from the government as an incentive and trading of the import license available in the market. The sale of import license received from government as a part of incentive includes RODTEP (Remission of duties and taxes on export product) and ROSCTL (Rebate of state & central Taxes and Levies). These e-scripts are issued by customs in respect of Remission of embedded local duties & taxes levied on FOB value of the exported goods. As the Company does not import any type of goods, they sale the same to the importer available in the market at a reasonable discount. As of June 30, 2024, it had 56 employees on its payroll (including 48 contract workers).

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden book building route IPO of 5418000 equity shares of Rs. 10 each to mobilize Rs. 13.00 cr. (at the upper cap). The company has announced a price band of Rs. 20 - Rs. 24 per share. The issue opens for subscription on November 08, 2024, and will close on November 12, 2024. The minimum number of shares to be applied is for 6000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 26.80% of the post-IPO paid-up capital of the company. From the net proceeds of the IPO, the company will utilize Rs. 5.57 cr. for capex on purchase of embroidery machines for expansion, Rs. 4.00 cr. for repayment/prepayment of certain borrowings, and the rest for general corporate purposes. 

The IPO is solely lead managed by Expert Global Consultants Pvt. Ltd., while Purva Sharegistry (India) Pvt. Ltd. is the registrar to the issue. Globalworth Securities Ltd., is the Market Maker for the company. The issue is underwritten to the tune of 15% by Expert Global and 85% by Globalworth. 

Having issued initial equity shares at par value, the company issued further equity shares in the price range of Rs. 33.00 - Rs. 1076 per share between May 2011, and July 2022. It has also issued bonus shares in the ratio of 30 for 1 in July 2022, and 1 for 1 in June 2023. The average cost of acquisition of shares by the promoters is Rs. 3.39, and Rs. 8.76 per share. 

Post-IPO, company's current paid-up equity capital of Rs. 14.80 cr. will stand enhanced to Rs. 20.22 cr. Based on the upper price band of the IPO, the company is looking for a market cap of Rs. 48.52 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has posted a total income/net profit of Rs. 103.80 cr. / Rs. 2.99 cr. (FY22), Rs. 105.41 cr. / Rs. 2.38 cr. (FY23), and Rs. 104.74 cr. / Rs. 2.46 cr. (FY24). For Q1 of FY25 ended on June 30, 2024, it earned a net profit of Rs. 0.81 cr. on a total income of Rs. 21.95 cr. 

For the last three fiscals, the company has reported an average EPS of Rs. 1.75 and an average RoNW of 12.40%. The issue is priced at a P/BV of 1.46 based on its NAV of Rs. 16.41 as of June 30, 2024, but post-IPO NAV data is missing from offer documents.

If we attribute FY25 annualized super earnings on post-IPO fully diluted equity capital, then the asking price is at a P/E of 15.09, and based on FY24 earnings, the P/E stands at 19.67. The issue appears fully priced. 

For the reported periods, the company has posted PAT margins of 2.94% (FY22), 2.30 % (FY23), 2.40% (FY24), 3.69% (Q1-FY25), and RoCE margins of 16.74% (FY22), 13.64% (FY23), 13.69% (FY24), 3.84% (Q1-FY25). Its debt-equity ratio of 3.12 as of June 30, 2024 raise concern. 

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

COMPARISION WITH LISTED PEERS:
As per the offer document, the company has shown Loyal Textiles, Bannari Amman Spg., as their listed peers. It is trading at a P/E of NA and NA (as of November 05, 2024). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
This is the 13th mandate from Expert Global in the last three fiscals (including the ongoing one).  Out of the last 10 listings, 2 opened at discount, and the rest opened with a premiums ranging from 15% to 110.36% on the date of listing.

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