Sathlokhar Synergys NSE SME IPO review (May apply)

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Review By Dilip Davda on July 27, 2024

•    The company is engaged in EPC contracts for all infrastructure related activities.
•    It shifted its focus on EPC from FY23 that yielded the benefits in the form of higher top and bottom lines.
•    The company has orders worth Rs. 450 cr. on hand.
•    Based on FY24 super earnings, the issue appears fully priced.
•    Investors may park funds for long term.

ABOUT COMPANY:
Sathlokhar Synergys E & C Global Ltd. (SSEGL) is an integrated engineering, procurement and construction ("EPC") (design and build) & infra turnkey contracting company providing specialized services for construction of buildings and infrastructure facilities for industrial, warehousing, commercial, institutional, pharmaceutical projects, solar projects, hospitals, hotels, resorts & villas etc. We are having experience in design and construction of various projects across states in India i.e. Tamil Nadu, Karnataka, Uttar Pradesh, West Bengal and Pondicherry. It also undertakes EPC projects for government entities through tender offering process. The company provides services across the value chain ranging from detailed designing, planning, procurement of all the materials except specialized work material, engineering of the project and project execution - the site work with overall project management and completion of all works up to commissioning and delivering or taking over for their intended purpose. 

The company also provides the installation of Mechanical, Electrical and Plumbing Networks in construction projects. It has in-house professionals; MEP Designers and Engineers who meticulously build and execute the MEP Projects. It is also an authorized channel partner for TATA Power Solar Systems Ltd, for providing installation, sales, commissioning and maintenance services of its products as per mutually agreed terms in relation with its Solar Power Projects.

It is an ISO 9001:2015 (Quality Management System), ISO 14001: 2015 (Environment Management System) and ISO 45001:2018 (Occupational Health & Safety Management System) certified company. Further, it bids independently on projects, tendered by departments of government authorities and other entities funded by the GoI.

We have integrated in-house capabilities to deliver a project from conceptualization to completion with faster turnaround time and focus on de-risking wherever possible. Its core competence lies in professionally managing the value chain and attracting and retaining talent to maximize value creation. The company is expanding its presence in other states to scale up its operations. As of the date of filing this offer document, it had 118 employees on its payroll. In addition, it also hires contractual labor as and when needed.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden book building route IPO of 6638000 equity shares of Rs. 10 each to mobilize Rs. 92.93 cr. at the upper cap. It has announced a price band of Rs. 133 - Rs. 140 per share. The issue opens for subscription on July 30, 2024, and will close on August 01, 2024. 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 27.50% of the post-IPO paid-up capital of the company. From the net proceeds of the IPO, it will utilize Rs. 73.00 cr. for working capital, and the rest for general corporate purposes. 

The issue is solely lead managed by GYR Capital Advisors Pvt. Ltd., and Purva Sharegistry (India) Pvt. Ltd. is the registrar to the issue. Giriraj Stock Broking Pvt. Ltd. is the market maker for the company and subscribing 3.66% of the total issue size, while Intellect Stock Broking Ltd. is subscribing 5.38% of the total issue size. Thus overall 9.04% of the total issue size is reserved for the market makers.

The company has issued entire initial equity shares at par value. It has issued bonus shares in the ratio of 31 for 4 in May 2024. There appears to be some mismatch in either number of shares allotted as bonus, or the ratio of bonus issue, as it does not tally the final paid-up capital before the IPO. The average cost of acquisition of shares by the promoters is Rs. 1.14 per share. 

Post-IPO, company's current paid-up equity capital of Rs. 17.50 cr. will stand enhanced to Rs. 24.14 cr. Based on the upper IPO price band, the company is looking for a market cap of Rs. 337.93 cr.  

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has posted a total income/net profit of Rs. 58.52 cr. / Rs. 0.88 cr. (FY22), Rs. 87.16 cr. / Rs. 5.46 cr. (FY23), Rs. 247.32 cr. / Rs. 26.21 cr. (FY24). According to the management, their focus on EPC contracts and other specialized services from FY23 onward yielded the benefits and FY24 earnings are attributed to this shift. The company has orders on hand worth Rs. 450 cr. and many more in the pipeline waiting approval. 

For the last three fiscals, it has reported an average EPS of Rs. 8.61, and an average RoNW of 46.69%. The issue is priced at a P/BV of 6.04 based on its NAV of Rs. 23.16 as of March 31, 2024, and at a P/BV of 2.53 based on its post-IPO NAV of Rs. 55.29 per share (at the upper cap). 

If we attribute FY24 earnings to its post-IPO fully diluted paid-up capital, then the asking price is at a P/E of 12.89, and based on FY23 earnings, the P/E stands at 61.95. Thus based on FY24 super earnings, the issue appears fully priced discounting all near term positives. 

For the reported periods, the company has posted PAT margins of 1.50% (FY22), 6.26% (FY23), 10.61% (FY24), and RoCE margins of 10.87%, 40.56%, 87.33% respectively for the referred periods. 

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, the company has shown K2 Infra, Suraj Estate Developers, and SRM Contractors as their listed peers. They are trading at a P/E of 27.5, 43.4 and 21.1 (as of July 26, 2024). However, they are not comparable on an apple-to-apple basis.

MERCHANT BANKER'S TRACK RECORD:
This is the 29th mandate from GYR Capital in the last four fiscals (including the ongoing one), out of the last 10 listings, all listed with premiums ranging from 36.36% to 366.67% on the date of listing. 

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