Patron Exim BSE SME IPO review (Avoid)

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Review By Dilip Davda on February 17, 2023

•    PEL is in the business of trading and distribution of pharma and chemical products.
•    The company depends on third-party product marketing. 
•    It has shown a mismatch in its top and bottom lines.
•    Higher spending for the IPO process indicates arranged funding. 
•    There is no harm in skipping this pricey issue. 

PREFACE:
PEL is the group company that had two SME IPOs earlier i.e. Earum Pharma and Evoq Remedies. Both these counters are trading at a discount to their issue price currently. Now the group is coming out with a third company having a similar business. This IPO is also priced aggressively. 

ABOUT COMPANY:
Patron Exim Ltd. (PEL) is engaged in the trading and distribution of a wide range of pharmaceutical raw material which is also known as APIs (Active Pharmaceutical Ingredients), industrial chemical, excipient and solvents. Presently its product portfolio comprises of around 150 AIPs, Excipient, Pharma Chemical & Intermediates.

PEL is also in the trading of a variety of chemicals, such as Petrochemicals, Dyes & Pigment Chemicals, Paints & Speciality Chemical, Agro Chemicals, Oil & Refinery Chemicals, Foam & Adhesive, Plywood & Laminates Chemical. The range of Chemicals also includes food industry & water treatment chemicals, resins & plastics chemicals, polymers and additives etc. As of the date of the prospectus, its business expansion is located in Ahmedabad and the surrounding area of Gujarat. As of December 22, 2022, it had 9 employees on its payroll. 

The group has other companies that are engaged in similar business and may pose a clash of interests. They are Earum Pharmaceuticals Ltd., Evoq Remedies Ltd., and Auxilia Pharmaceuticals Pvt. Ltd.  Madrid Diamond Pvt. Ltd. is also the associate company. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden IPO of 6180000 equity shares of Rs. 10 each at a fixed price of Rs. 27 per share to mobilize Rs. 16.69 cr. The issue opens for subscription on February 21, 2023, and will close on February 24, 2023. The minimum application is to be made for 4000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. The issue constitutes 26.66% of the post-issue paid-up equity capital of the company. PEL is spending Rs. 1.42 cr. for this IPO process and from the net proceedings, it will utilize Rs. 11.47 cr. for working capital, and Rs. 3.80 cr. for general corporate purposes. 

Interactive Financial Services Ltd. is the lead manager and Bigshare Services Pvt. Ltd. is the registrar of the issue. Sunflower Broking Pvt. Ltd. is the market maker for the company. This issue is underwritten by Lead Manager for only 15% while the market maker is having the rest portion.

Having issued/converted initial equity at par, the company issued/converted further equity at a price of Rs. 27 per share in December 2022. The average cost of acquisition of shares by the promoters is Rs. NIL per share. 

Post IPO, PEL's current paid-up equity capital of Rs. 17.00 cr. will stand enhanced to Rs. 23.18 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 62.59 cr.

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, PEL has posted a turnover/net profit of Rs. 25.16 cr. / Rs. 0.02 cr. (FY20), Rs. 20.54 cr. / Rs. 0.07 cr. (FY21), and Rs. 5.02 cr. / Rs. 0.83 cr. (FY22). For the first 8 months of FY23 ended on November 30, 2022, it earned a net profit of Rs. 1.45 cr. on a turnover of Rs. 10.54 cr. For the last three fiscals, while its top line marked de-growth, its bottom line kept surging and that raise eyebrows. The sudden boost in net profits for the last 20 months working is surprising.  

For the mismatch in its top and bottom lines, as explained on page 69 of the offer document, the company had switched to acting as a commission agent and charging the commission instead of purchasing the goods and selling the goods.

For the last three fiscals, PEL has reported an average EPS of Rs. 0.91 and an average RoNW of 9.12%. The issue is priced at a P/BV of 2.49 based on its NAV of Rs. 10.84 as of November 30, 2022, and at a P/BV of 1.63 based on its post-IPO NAV of Rs. 16.54 per share. 

If we annualize FY23 earnings and attribute it to the post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of around 28.72. Thus the issue is aggressively priced. 

DIVIDEND POLICY:
The company has not declared any dividends for the reported periods of the offer document. 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 Vaishali Pharma and Earum Pharma as their listed peers. They are currently trading at a P/E of 23.60 and 14.12 (as of February 17, 2023). However, they are not truly comparable on an apple-to-apple basis.  

MERCHANT BANKER'S TRACK RECORD:
This is the 6th mandate from Interactive Financial in the last two fiscals (including the ongoing one). Out of the last 5 listings, 2 opened at discount and the rest with premiums ranging from 0.08% to 2.22% on the listing day. Thus it has a poor track record.

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