Sanstar IPO review (May apply)

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Review By Dilip Davda on July 15, 2024

•    The company is one of the major manufacturers of speciality products and ingredient solutions in India for food, animal nutrition and other industrial applications.
•    The company exports its products to over 49 countries globally.
•    While it posted inconsistency in top lines, its bottom line marked steady growth.
•    Based on FY24 super earnings, the issue appears aggressively priced. 
•    Well-informed investors may park moderate funds for the long term.

ABOUT COMPANY:
Sanstar Ltd. (Sanstar) is one of the major manufacturers of plant based speciality products and ingredient solutions in India for food, animal nutrition and other industrial applications (Source: Company Commissioned Frost & Sullivan Report, dated May 18, 2024). Its products include liquid glucose, dried glucose solids, maltodextrin powder, dextrose monohydrate, native maize starches, modified maize starches and co-products like germs, gluten, fiber and enriched protein, amongst others. 

Sanstar's speciality products and ingredients solutions add taste, texture, nutrients and increased functionality to (i) foods as ingredients, thickening agents, stabilizers, sweeteners, emulsifiers and additives (in bakery products, confectionery, pastas, soups, ketchups, sauces, creams, deserts, amongst others), (ii) animal nutrition products as nutritional ingredients, and (iii) other industrial products as disintegrates, excipients, supplements, coating agents, binders, smoothing & flattering agents, finishing agents, among others.

As per Frost & Sullivan (Company Commissioned Report, dated May 18, 2024), with an installed capacity of 3,63,000 tons per annum (1,100 tons per day), it is the fifth largest manufacturer of maize based speciality products and ingredient solutions in India. Its leading position in the industry, technical knowledge to bring specific functionality and nutrition to end products, more than five decades of presence, state of the art manufacturing facilities, diverse product portfolio and clientele in domestic and global markets, provide it with competitive advantage.

Sanstar is a recognised Two Star Export house from Director General of Foreign Trade, Government of India, while Sanstar Biopolymers Limited, the erstwhile Company which was merged with it pursuant to NCLT, Ahmedabad order dated November 23, 2023, is a recognised Three Star Export House. The company exported products to 49 countries across Asia, Africa, Middle East, Americas, Europe and Oceania, during Fiscal 2024, on the basis of its Restated Consolidated Financial Statements. Additionally, the Company has footprints across India, with its products being sold in 22 states on the basis of Restated Consolidated Financial Statements, as on the date of this Red Herring Prospectus. As of March 31, 2024, the company has presence in 49 countries for exports. As of the said date, it had 271 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden combo IPO of 41800000 fresh equity shares issue (worth approx. Rs. 397.10 cr. at the upper cap), and an Offer for Sale (OFS) of 11900000 equity shares (worth Rs. 113.05 cr. at the upper cap). The company has announced a price band of Rs. 90 - Rs. 95 per equity shares of Rs. 2 each. The overall size of the issue will be approx. 53700000 shares worth Rs. 510.15 cr. The issue opens for subscription on July 19 2024, and will close on July 23, 2024. The minimum application to be made is for 150 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 29.47% of the post-IPO paid-up equity capital. From the net proceeds of the fresh equity issue, the company will utilize Rs. 181.56 cr. for capex on expansion at Dhule plant, Rs. 100.00 cr. for repayment/prepayment of certain borrowings., and the rest for general corporate purposes. 

The sole Book Running Lead Manager to this issue is Pantomath Capital Advisors Pvt. Ltd., while Link Intime India Pvt. Ltd. is the registrar to the issue. 

Having issued initial equity shares at par, the company issued further equity shares at a fixed price of Rs. 4.20 per share (based on Rs. 2 FV), in December 2023. It has also issued bonus shares in the ratio of 1 for 1 in March 2012. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 0.34, Rs. 0.35, Rs. 0.44, Rs. 0.70, Rs. 1.80, and Rs. 2.17 per share. 

Post-IPO, its current paid-up equity capital of Rs. 28.09 cr. will stand enhanced to Rs. 36.45 cr. Based on the upper cap of the IPO price band, the company is looking for a market cap of Rs. 1731.32 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has (on a consolidated basis) posted a total income/net profit of Rs. 504.77 cr. / Rs. 15.92 cr. (FY22), Rs. 1209.67 cr. / Rs. 41.81 cr. (FY23), and Rs. 1081.68 cr. / Rs. 66.77 cr. (FY24). 

For the last three fiscals, the company has posted an average EPS of Rs. 3.55 and an average RoNW of 30.22%. The issue is priced at a P/BV of 6.18 based on its NAV of Rs. 15.37 as of March 31, 2024, and at a P/BV of 2.82 based on its post-IPO NAV of Rs. 33.64 per share (at the upper cap). 

If we attribute FY24 annualized earnings to its post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 25.96. Based on FY23 earnings, the P/E stands at 41.49. Thus the issue is aggressively priced. 

The company reported PAT margins of 3.15% (FY22), 3.46% (FY23), 6.17% (FY24), and RoCE margins of 23.19%, 23.82%, 25.73% for the referred periods, respectively. For the last three fiscals, the company has posted CAGR of 45.46% for Revenues and 104.79% CAGR for PAT.

According to the management, its recently started solar power and gas power projects are going to contribute in bottom lines, and reduction in debt with bring savings in finance cost and the ongoing expansion will add to its top and bottom lines in coming years, that will improve their ratio of 36: 64 export: domestic revenues with added margins following improved product quality. The company enjoys good demand for its derivative products across the food/pharma/personal care industry.

DIVIDEND POLICY:
The company has not declared any dividends for the reported periods of the offer document. It has already adopted a dividend policy in November 2023, based on its financial performance and future prospects.

COMPARISON WITH LISTED PEERS:
As per the offer document, the company has shown Gujarat Ambuja Exports, Gulshan Polyols, and Sukhjit Starch, as their listed peers. They are trading at a P/E of 18.0, 71.8, and 14.3 (as of July 12, 2024). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
This is the 10th mandate from Pantomath Capital in the last three fiscals (including the ongoing one). Out of the last 8 listings, all listed with a premiums ranging from 27% to 100.45% on the date of listing.

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