Retina Paints BSE SME IPO review (Avoid)

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Review By Dilip Davda on April 13, 2023

•    RPL is engaged in the decorative paint manufacturing of various grades.
•    Its financial performance so far remains at a minuscule level. 
•    Based on its financial data, the issue is exorbitantly priced. 
•    It is operating in a highly competitive and fragmented segment.
•    There is no harm in skipping this pricey issue. 

ABOUT COMPANY:
Retina Paints Ltd. (RPL) is into manufacturing Decorative Paints like Distempers, Primers, Wall Care Products, Emulsions, etc. and further, sell them to different Distributors. It sources raw materials at present indigenously for the manufacturing of Paints. RPL's water-based paints are used for residential and for commercial buildings. The company has recently introduced tinting machines which comprise a plurality of colourant reservoirs containing a colourant, one or more cleaning fluid supply conduits and one or more dispenser heads for dispensing colourant into a paint container.

The Company works on B2B Business Model, it sells products to dealers and distributors and then they sell to the end customers. It is having exposure to the markets of Telangana, Andhra Pradesh and Odissa, and soon it will be expanding to other states as well. RPL competes with a few of the major players from the Organized Market and a few from the Unorganized Market in the Paint Industry. The company has water-based products in its basket, it is also aiming for oil-based products. Oil-based products are applied to wood, iron, etc. The company recently expanded its capacity and this new plant is already in operation. As of December 2022, RPL had approximately (?) 21 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden IPO of 3700000 equity shares of Rs. 10 each at a fixed price of Rs. 30 per share to mobilize Rs. 11.10 cr. The issue opens for subscription on April 19, 2023, and will close on April 24, 2023. The minimum application to be made is for 4000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. The issue constitutes 26.54% of the post-issue paid-up capital of the company. RPL is spending Rs. 1.00 cr. for this IPO process, and from the net proceeds, it will utilize Rs. 8.00 cr. for working capital and Rs. 2.10 cr. for general corporate purposes.

The issue is solely lead managed by Gretex Corporate Services Ltd. and Bigshare Services Pvt. Ltd. is the registrar of the issue. Gretex group company Gretex Share Broking Pvt. Ltd. is the market maker for the company. 

Having issued initial equity shares at par, the company issued further equity shares at a fixed price of Rs. 30 per share in the month of November 2022. It has also issued bonus shares in the ratio of 21 for 1 in May 2019 and 1 for 1 in January 2023. The average cost of acquisition of shares by the promoters is Rs. 9.11 and Rs. 11.23 per share.   

Post-IPO, RPL's current paid-up equity capital of Rs. 10.24 cr. will stand enhanced to Rs. 13.94 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 41.82 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, RPL has posted a turnover/net profit of Rs. 6.81 cr. / Rs. 0.05 cr. (FY20), Rs. 6.86 cr. / Rs. 0.05 cr. (FY21), and Rs. 6.47 cr. / Rs. 0.11 cr. (FY22). The sudden boost in the bottom line on declined profits for FY22 raises eyebrows. For the first eight months of FY23 ended on November 30, 2022, it earned a net profit of Rs. 0.40 cr. on a turnover of Rs. 5.34 cr. is even more surprising. It appears to pave the way for fancy pricing of the IPO, some window dressing is done with a boost in other income. 

For the last three fiscals, RPL has reported an average EPS of Rs. 0.13 and an average RoNW of 5.03%. The issue is priced at a P/BV of 1.70 based on its NAV of Rs. 17.65 as of November 30, 2022, and at a P/BV of 1.86 based on its post-IPO NAV of Rs. 16.15 per share. (There appears to be some mismatch in post-IPO NAV).

If we annualize FY23 super earnings and attribute it to post-IPO fully diluted paid-up capital, then the asking price is at a P/E of 69.77 and based on FY22 earnings, it is at a P/E of 375. Thus the IPO is exorbitantly priced discounting all near-term positives.

According to management, it maintained the top line in the Pandemic and post-pandemic period and with its expansion plans and enhancement in its product portfolio, it hopes to do much better going forward. 

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 Asian Paints and Indigo Paints as their listed peers which is nothing but an eyewash. They are currently trading at a P/E of 71.52 and 43.74 (as of April 13, 2023). However, they are not truly comparable on an apple-to-apple basis and comparison with such bigwigs is really surprising. 

MERCHANT BANKER'S TRACK RECORD:
This is the 16th mandate from Gretex Corporate in the last four fiscals (including the ongoing one). Out of the last 10 listings, 1 opened at discount, 1 at par and the rest listed at premiums ranging from 0.47% to 67.71% on the listing date. Thus it has an average track record.

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