Rangoli Tradecomm BSE SME IPO review (Avoid)

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Review By Dilip Davda on March 5, 2021

•    RTL is in the business of trading polymers and textiles.
•    It depends on third party contracts for its trading business.
•    Perhaps other income helped RTL to show profits.
•    Sustainability of FY21-H1 performance is a million-dollar question.
•    The issue is aggressively priced. No harm in giving it a miss.

ABOUT COMPANY:
Rangoli Tradecomm Ltd.  (RTL) is currently engaged in the business of trading Polymers and Textile products. Polymer trading business includes commodity polymer, engineering polymer & chemicals and additives while Textile trading business includes trading of yarns, threads and fabrics.

The company's Registered Office is situated in Kolkata in the state of West Bengal and has 2 (two) corporate offices situated at Mumbai and Gurgaon. It also has a presence in North India, Delhi, Haryana, Himachal Pradesh, Rajasthan and Punjab & also covering the western regions of Gujarat and Maharashtra.RTL functions on two business models i.e. B2B as well as B2C. As of January 15, 2021, the company had on roll 29 employees besides the board of directors. Since it does trading only, it has no plant and machinery. In short, the company is working as a one-stop trading house for a variety of polymers and textile products under one roof. However, the company does not have any fix contracts for buying or selling products.

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its plans for working capital (Rs. 34.01 cr.), general corpus funds (Rs. 10.84 cr.), RTL is coming out with a maiden IPO of 2181000 equity shares of Rs. 10 each at a fixed price of Rs. 207 per share to mobilize Rs. 45.15 cr. The issue opens for subscription on March 09, 2021, and will close on March 12, 2021. Minimum application is to be made for 600 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME.

The issue constitutes 26.47% of the post issue paid-up capital of the company. The issue is solely lead managed by Fedex Securities Pvt. Ltd. and Bigshare Services Pvt. Ltd. is the registrar to the issue. Rikhav Securities Ltd. is the market maker for this company. The company will be spending around Rs. 0.30 cr. for this issue process.

Having issued initial equity at par, RTL issued further equity at the pricing of Rs. 325.00 and Rs. 1000.00 between March 2011 and January 2021. It has also issued bonus shares in the ratio of 3 shares for every 1 share held in January 2021. The average cost of acquisition of shares by the promoters is Rs. 3.00 and Rs. 81.25 per share.

Post issue, RTL's current paid-up equity capital of Rs. 6.06 cr. will stand enhanced to Rs. 8.24 cr. With the IPO pricing, the company is looking for a market cap of Rs. 170.59 cr.

FINANCIAL PERFORMANCE:
On the financial performance front, RTL has posted turnover/net profits of Rs. 0.001 cr. / Rs. - (0.0001) cr. (FY18), Rs. 3.52 cr. / Rs. 2.93 cr. (FY19) and Rs. 165.44 cr. / Rs. 2.11 cr. (FY20). For the first six months of FY21 ended on September 30, 2020, it has earned a net profit of Rs. 10.93 cr. on a turnover of Rs. 146.84 cr.  H1 FY21 had no other income while FY19 and FY20 had higher other income of Rs. 3.52 cr. and 2.98 cr. respectively.  

For the last three fiscals, the company has reported an average EPS of Rs. 9.24 and an average RoNW of 18.65%. The issue is priced at a P/BV of 1.99 based on its NAV of Rs. 103.97 as of September 30, 2020, and at a P/BV of 1.83 based on its post-issue NAV of Rs. 113.37.

FY20 and H1 of FY21 data are showing an alarming situation for trade payables. Cash on hand of Rs. 13.60 cr. as of September 30, 2020, raises eyebrows. (Page 44 and 45 of offer documents).

If we annualize the latest earnings and attribute in on fully diluted equity post issue, then the asking price is at a P/E of around 7.83. On the basis of FY20 earnings, the asking price is at a P/E of 80 plus. The issue appears aggressively priced on the basis of its average earnings. In the IPO year boosted bottom line raises doubt of window dressings. Such super earnings in the first half of the current fiscal with a disturbed period of lockdown are really surprising. The sustainability of such performance going forward is a million-dollar question. H1 of FY21 has posted a higher net following inventory adjustments as it appears.

COMPARISION WITH LISTED PEERS:
As per offer documents, RTL has shown Amani Trading, Euro Asia Exports and Hind Commerce as its listed peers that are currently trading at a P/Es of around 58.04, 8.17 and 2.79 (as of March 05, 2021 ). However, they are not comparable on an apple to apple basis.

DIVIDEND POLICY:
While the company has not paid any dividend till FY20, it has announced a maiden dividend of 10% on a tiny paid-up capital of Rs. 0.73 cr. for the current fiscal. RTL will follow a prudent dividend policy based on its performance and prospects going forward.

MERCHANT BANKER'S TRACK RECORD:
This is the 10th mandate from its stable in the last three fiscals (including the ongoing one). Out of the last 9 listings, 1 opened at discount, 2 issues opened at par and the rest with a premium ranging from 0.16% to 56.52%. Thus it has an average track record.

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