Qualitek Lab BSE SME IPO review (Avoid)

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Review By Dilip Davda on January 17, 2024

•    QLL is operating in a highly competitive and fragmented segment of lab testing.
•    It posted growth in its top and bottom lines for the reported periods.
•    The sustainability of such margins going forward is a major concern. 
•    Based on FY24 super earnings, the issue appears aggressively priced. 
•    There is no harm in skipping this pricey bet. 

PREFACE:
Though the prospectus is dated January 12, 2024, it was not available on public domains till the morning of January 17, 2024 that raised eyebrows. As known, this IPO is scheduled to open on January 18, 2024, and thus analysts, investors were in dark till previous morning about the info of this IPO. It also announced its IPO ad on January 17, 2024 in pink paper. Are these kind of delay permissible?

ABOUT COMPANY:
Qualitek Labs Ltd. (QLL) is primarily engaged in the business of provides testing, inspection, homologation, certification and consultancy services to various industries viz the automotive, defence, metals & metallurgy, environment and water, minerals, food & agriculture, pharma & healthcare.

The Company has commenced its business operation of providing services to clients from a testing laboratory, which was set up in Pune in the year 2018. Later in the year 2022, it expanded and established the second laboratory in Bhubaneshwar. Currently, the Company is in process of setting up another two testing laboratories at Pune and Noida. As of the date of filing this offer document, it had 144 employees on its payroll.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden IPO of 1964400 equity shares of Rs. 10 each at a fixed price of Rs. 100 per share to mobilize Rs. 19.64 cr. The issue opens for subscription on January 18, 2024, and will close on January 23, 2024. The minimum application to be made is for 1000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. The issue constitutes 26.65% of the post-IPO paid-up capital of the company. It is spending Rs. 1.33 cr. for this IPO process, and from the net proceeds, it will utilize Rs. 6.22 cr. for capex of expansion of lab, Rs. 8.18 cr. for repayment of borrowings from promoters, Rs. 2.50 cr. for working capital, and Rs. 1.41 cr. for general corporate purposes.  

The issue is solely lead managed by Oneview Corporate Advisors Pvt. Ltd. and Skyline Financial Services Pvt. Ltd. is the registrar of the issue. Nikunj Stock Brokers Ltd. is the market maker for the company. 

Having issued initial equity shares at par value, the company issued/converted further equity shares in the price range of Rs. 12 - Rs. 160 between October 2021 and November 2022. It has also issued bonus shares in the ratio of 6 for 1 in December 2022. The average cost of acquisition of shares by the promoters is Rs. 11.10 per share. 

Post-IPO, company's current paid-up equity capital of Rs. 5.41 cr. will stand enhanced to Rs. 7.37 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 73.72 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has (on a standalone basis) posted a total income/net profit of Rs. 6.37 cr. / Rs. 0.46 cr. (FY21), Rs. 12.02 cr. / Rs. 1.14 cr. (FY22), and Rs. 19.35 cr. / Rs. 2.97 cr. (FY23), and for H1 of FY24 ended on September 30, 2023, it earned a net profit of Rs. 2.01 cr. on a total income of Rs. 12.51 cr. The sudden boost in its bottom lines for the last 18 months appears to be a window dressing to match the asking price. 

On a consolidated basis, for FY21 it posted a total income of Rs. 6.37 cr. with a net profit of Rs. 0.15 cr. and for FY22 it reported a net profit of Rs. 0.42 cr. on a total income of Rs. 12.06 cr. Thus it marked average performance on a consolidated basis. 

For the last three fiscals, on a standalone basis, the company has reported an average EPS of Rs. 17.36, and an average RoNW of 1.54%. The issue is priced at a P/BV of 4.55 based on its NAV of Rs. 21.96 as of September 30, 2023, and at a P/BV of 2.50 based on its post-IPO NAV of Rs. 40.03 per share. 

If we attribute annualized sure earnings for FY24 to company's post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 18.35. Thus the issue appears aggressively priced. The sustainability of margins reported is a major concern as it is operating in a highly competitive and fragmented segment. 

The company has posted PAT margins of 7.26% (FY21), 9.49% (FY22), 15.52% (FY23), 16.09% (H1-FY24), and RoCE margins of 6.38%,9.34%, 13.76%, 8.47% respectively for the referred periods. 

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

COMPARISON WITH LISTED PEERS:
As per the offer document, the company has shown Choksi Lab as their listed peer. It is trading at a P/E of 14.30 (as of January 17, 2024). However, they are not comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
This is the 2nd mandate from Oneview Corporate in the last two fiscals. The only listing took place so far opened at a premium of 20% on the date of listing.

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