Saroja Pharma NSE SME IPO review (Avoid)

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Review By Dilip Davda on August 29, 2023

•    SPIIL is currently into trading of Pharma ingredients and specialty chemicals. 
•    It marked inconsistency in its top and bottom lines for the reported periods. 
•    The company mulls entering into the manufacturing of APIs.
•    Based on FY23 earnings, the issue is greedily priced. 
•    There is no harm in skipping this "High Risk/Low Return" bet. 

ABOUT COMPANY:
Saroja Pharma Industries India Ltd. (SPIIL) was incorporated with the objective of the best service deliverance in chemical trading with the best premium pharmaceutical companies in India and abroad for cost-effective human and veterinary medicine. The Company trades in Pharma API, Pharma Intermediates, Chemicals, and Solvents used for pharmaceutical products and human and veterinary medicine. 

The Company was formed with a mission being providing clientele with specification-based approved products at competitive pricing with hassle-free dispatch within India or aboard contributing to cost effectiveness in end products for human and veterinary medicine. The company that was in a third-party contract manufacturing and trading has not planned to enter manufacturing on API pharma products for veterinary use. 

It is into Active Pharmaceuticals Ingredients, Specialty Chemicals, and Intermediates for Pharma trading. The company is also into specialty chemicals imports & exports as well as supply of the same to the actual users. As per the client's needs and requirements, it provides customised specialty chemicals in India and abroad regularly. Its Specialty chemicals & intermediates have wide applications in sectors like pharma, agro & chemicals for human and veterinary. As of March 31, 2023, it had 13 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden IPO of 1084800 equity shares of Rs. 10 each at a fixed price of Rs. 84 per share to mobilize Rs. 9.11 cr. The issue opens for subscription on August 31, 2023, and will close on September 05, 2023. The minimum application to be made is for 1600 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 26.98% of the post-IPO paid-up capital of the company. SPIIL is spending Rs. 0.31 cr. for this IPO process and from the net proceeds, it will utilize Rs. 7.05 cr. for setting up of a manufacturing unit and Rs. 1.75 cr. for the repayment of an unsecured loan.

Swastika Investmart Ltd. is the sole lead manager and KFin Technologies Ltd. is the registrar of the issue. Swastika Investmart Ltd. is also the market maker for the company. 

Having issued initial equity shares at par value, the company converted further equity shares at a price of Rs. 1106 per share in February 2022 and has also issued bonus shares in the ratio of 12 for 1 in February 2023. The average cost of acquisition of shares by the promoters is Rs. 0.77, and Rs. 6.76 per share. 

Post-IPO, SPILL's current paid-up equity capital of Rs. 2.94 cr. will stand enhanced to Rs.4.02 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 33.77 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, SPILL has posted a turnover/net profit of Rs. 36.75 cr. / Rs. 0.73 cr. (FY21), Rs.  55.96 cr. / Rs. 1.14 cr. (FY22), and Rs. 50.35 cr. / Rs. 1.06 cr. (FY23). Thus it has posted inconsistency in its top and bottom lines for the reported periods. 

For the last three fiscals, it has reported an average EPS of Rs. 3.57 and an average RoNW of 32.89%. The issue is priced at a P/BV of 4.85 based on its NAV of Rs. 17.33 as of March 31, 2023, and at a P/BV of 2.38 based on its post-IPO NAV of Rs. 35.32 per share. 

The company has posted an average PAT margin of around 2% for the reported periods. 

If we attribute FY23 earnings to its post-IPO paid-up equity capital, then the asking price is at a P/E of around 31.82. Thus the IPO appears greedily priced discounting all near-term positives. 

DIVIDEND POLICY:
The company has not declared any dividends for the reported periods of the offer document. It will adopt a prudent dividend policy based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per the offer document, SPIIL has shown NGL Fine Chem and Sequent Scientific as their listed peers. They are currently trading at a P/E of 46.32, and 00 (as of August 28, 2023). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
This is the 8th mandate from Swastika Investmart in the last three fiscals (including the ongoing one). Out of the last 7 listings, 1 opened at a discount, 1 at par and the rest with premiums ranging from 4.17% to 36.25% on the date of the listing.

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