Rockingdeals Circular NSE SME IPO review (Avoid)

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Review By Dilip Davda on November 18, 2023

•    RCEL is in the business of B2B re-commerce and deals in bulk trading of excess inventories.
•    While its top line remained static, bottom line boost raises eyebrows and concern over sustainability.
•    The issue appears aggressively priced based on its super annualized earnings for FY24.
•    The sustainability of such margins going forward is a major concern.
•    There is no harm in skipping this pricey bet. 

PREFACE:
This company has given its financial data on the basis of Rs. Hundreds which looks like an eyewash. It is operating in a highly competitive segment with many big players around. 

ABOUT COMPANY:
Rockingdeals Circular Economy Ltd. (RCEL) is primarily a B-2-B re-commerce player which started its operations in 2005. The company is primarily engaged in bulk trading of excess inventory, open boxed inventory, re-commerce products and refurbished products. These products range in several categories such as small home appliances, apparel, kitchenware's and household, speaker & mobile accessories, large appliances, footwear etc. These products are generally of various well-known brands such as Samsung, Thomson, MI, LG, symphony, ZARA, Nike, Reebok, Campus, Sony, JBL, Boat, Gizmore, One Plus, etc.

As RCEL is more of B2B platform, Rockingdeals CE take the aforementioned products in bulk from various dealers of Inalsa, Khaitan, etc., and supplies these products in bulk to clients such as Jindal Mega Mart, Brand Wala, VLE Bazaar Private Limited, HIC International, PSUAVI, KRAT India, Zazz Technology besides its sister companies such as (Rockingdeals Private Limited, Rockingdeals (HYD) Private Limited, Harkrishanji Products Private Limited). 

As on date the company has over 18 categories of Stock Keeping Units (SKU) i.e., electrical appliances (Syska, Havells, LG, Panasonic, Usha, Crompton, Luminous, Phillips etc.), apparels & footwear (Zara, Nike, Campus etc.), speaker (Boat, JBL, Gizmore), mobile and mobile accessories (Lenovo, Boat, Gizmore etc.) and various other products which the company procures from ecommerce vendors of platforms like Snapdeal (Juscorp), affiliates of Flipkart and Amazon etc., companies like GO Auto, Salora International, Zazz Technology Connect Private Limited; and dealers & distributors like Matrix Housewares, Raj Agency, Sudhi Enterprises etc. As of the date of filing this offer document, it had 18 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden book built route IPO of 1500000 shares (worth Rs. 21 cr. at the upper cap). It has announced a price band of Rs. 136 - Rs. 140 per share of Rs. 10 each. The issue opens for subscription on November 22, 2023, and will close on November 24, 2023. The minimum application to be made is for 1000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 26.51% of the post-IPO paid-up capital of the company.  From the net proceeds of the equity shares issue, the company will utilize Rs. 14.00 cr. for capital expenditure, Rs. 1.42 cr. for branding and marketing expenses, and the rest for general corporate purposes. 

The company has reserved 85000 shares for the Market Maker and from the rest, it has allocated not more than 700000 shares for QIBs, not less than 215000 shares for HNIs and not less than 500000 shares for Retail investors. 

The issue is solely lead managed by Corporate Capitalventures Pvt. Ltd. and Bigshare Services Pvt. Ltd. is the registrar of the issue. SS Corporate Securities Ltd. is the market maker for the company. 

RECL has issued initial equity shares at par value and has issued further equity shares in the price range of Rs. 100 - Rs. 500 per share between October 2008 and September 2023. It has also issued bonus shares in the ratio of 29 for 1 in April 2023. The average cost of acquisition of shares by the promoters/selling stake holders is Rs. 1.60, Rs. 8.44, and Rs. 14.93 per share. 

Post-IPO, RECL's current paid-up equity capital of Rs. 4.16 cr. will stand enhanced to Rs. 5.66 cr. Based on the upper price band of the IPO price, the company is looking for a market cap of Rs. 79.23 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, RCEL has posted total income / net profit/ m- (loss) of Rs. 10.70 cr. / Rs. - (0.02) cr. (FY21), Rs. 15.33 cr. / Rs. 0.14 cr. (FY22), and Rs. 15.17 cr. / Rs. 1.54 cr. (FY23). For the Q1 of FY24 ended on June 30, 2023, it earned a net profit of Rs. 1.25 cr. on a total income of Rs. 9.58 cr. The sudden boost in its bottom lines for the last 15 months raises eyebrows and appears to be a window dressing to fetch fancy valuations. The sustainability of such margins remains major concern.

For the last three fiscals, the company has reported an average EPS of Rs. 2.22, and an average RoNW of 11.97%. The issue is priced at a P/BV of 6.29 based on its NAV of Rs. 22.25 as of June 30, 2023, and at a P/BV of 2.33 based on its post-IPO NAV of Rs. 60.05 per share (at the upper band). 

If we attribute annualized FY24 earnings to post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 15.82. While on the basis of FY23 earnings, the P/E stands at 51.28. Thus issue appears aggressively priced. 

DIVIDEND POLICY:
The company has not declared any dividends since incorporation. 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 no listed peers to compare with.

MERCHANT BANKER'S TRACK RECORD:
This is the 9th mandate from Corporate Capitalventures in the last three fiscals (including the ongoing one). Out of the last 8 listings, 3 opened at discount, and the rest with premiums ranging from 17.65% to 231.63% on the day of listing. 

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