Resgen BSE SME IPO review (May apply)

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Review By Dilip Davda on February 23, 2023

•    The company is in the manufacturing of pyrolysis oil - a substitute for diesel/fuel.
•    Its super margins for the sub-period of FY23 raise eyebrows and concern over sustainability.
•    Based on super earnings, the issue appears aggressively priced. 
•    It's a high-risk/low-return bet considering large equity in the context of its turnover.
•    Well-informed cash surplus investors may consider it for the long term, while others may skip it.

PREFACE:
It is really surprising that the company which has no performance track record for the last three fiscals is permitted to go ahead with its IPO for BSE SME listing. As per the risk factor, the company has put a disclaimer of its operations in the renewable energy segment that involves a substantial degree of risk following changes in rapidly changing technology and Government Policies. Due to stringent norms, it took nearly 2 years to achieve the quality of its products and started commercial operations only in FY22. The issue is aggressively priced based on its current workings.

ABOUT COMPANY:
Resgen Ltd. (RESGEN) - (erstwhile known as Ecojanitors Ltd.) is engaged in the process of manufacturing Pyrolysis Oil (a substitute for furnace oil) from all kinds of waste plastics and branded it as PlasEco. During the manufacturing of PlasEco, it is able to repurpose the by-products generated, such as Carbon, which substitutes for coal; and Gas, which substitutes for LPG. The company has set up a Chemical Recycling Plant in Vikramgad (Palghar), Maharashtra, considering its proximity to the Municipal Corporations of Mumbai, Thane, Kalyan & Dombivli. 

The company has come up with an ingenious method, which is not only eco-friendly but also gives by-products which are very essential to one and all. The major by-products are combustible liquid and gaseous fuel, it can replace diesel or furnace oils. RESGEN was founded on the idea of using plastic waste and converting it into a substitute for fuel. As of December 2022, it had 8 employees on its payroll. The company is operating in a highly competitive segment.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden IPO of 6000000 equity shares of Rs. 10 each via book building route to mobilize Rs. 28.20 cr. at the upper cap. It has announced a price band of Rs. 45 - Rs. 47 per share. The issue opens for subscription on February 28, 2023, and will close on March 02, 2023.  The minimum application is to be made for 3000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. The issue constitutes 28.61% of the post-issue paid-up capital of the company. The company has allocated 50% for QIB, 35% for Retail and 15% for HNI investors. 

The company is spending Rs. 3.20 cr. for this IPO process indicating arranged funding. From the net proceedings, it will utilize Rs. 1.76 cr. for the purchase of additional land at the existing plant, but the offer document is silent on spending for working capital and general corporate purpose needs.

Gretex Corporate Services Ltd. is the sole lead manager and Bigshare Services Pvt. Ltd. is the registrar of the issue. Gretex Share Broking Pvt. Ltd. is the market maker for the company. 

Having issued initial equity shares at par, the company issued/converted further equity shares in the price range of Rs. 24 and Rs. 45 (based on Rs. 10 FV) between June 2021 and December 2022. It has also issued bonus shares in the ratio of 5 for 2 in December 2022. The average cost of acquisition of shares by the promoters is Rs. 2.86 and Rs. 8.59 per share. 

Post-IPO, RESGEN's current paid-up equity capital of Rs. 14.98 cr. will stand enhanced to Rs. 20.98 cr. Based on the upper cap of the IPO price, the company is looking for a market cap of Rs. 98.58 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, RESGEN has posted a turnover/net profit - Loss of Rs. 0.00 cr. / Rs. - (0.15) cr. (FY20), Rs. 0.002 cr. / Rs. 0.01 cr. (FY21), Rs. 4.81 cr. / Rs. 0.74 cr. (FY22). For the period ended on December 05, 2022, of FY23, it earned a net profit of Rs. 2.46 cr. on a turnover of Rs. 12.65 cr.

For the last three fiscals, the company has reported an average EPS of Rs. 0.28 and an average RoNW of 10.14%. The issue is priced at a P/BV of 3.95 based on its NAV of Rs. 11.91 and at a P/BV of 2.43 based on its post-IPO NAV of Rs. 19.35 (at the upper cap).

If we annualize FY23 super earnings and attribute them to post-IPO fully diluted paid-up equity capital, the asking price is at a P/E of 27.33. Thus the issue is aggressively priced. 

According to the management, the company is ready with its planned installed capacity and is now focusing on scaling up its operations. It is a first mover in this segment and is poised for the bright prospects ahead. Higher utilization of capacities will increase its margins. 

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 no listed peers to compare with. 

MERCHANT BANKER'S TRACK RECORD:
This is the 14th mandate from Gretex Corporate in the last three fiscals (including the ongoing one). Out of the last 10 listings, 2 opened at a discount and the rest were listed at premiums ranging from 0.47 % to 67.71 % on the listing date. It has a poor track record.

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