Shree Karni NSE SME IPO review (Apply)

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Review By Dilip Davda on March 2, 2024

•    SKFL is in the manufacturing and marketing of specialized technical textiles that is tailor made as per client's specifications. 
•    It posted pressure on bottom lines due to accounting adjustments for its completed expansion plan. 
•    The company is ready to reap benefits of its new facilities which is reflected in its current working of FY24-8M.
•    Based on FY24 annualized super earnings, the issue appears reasonably priced. 
•    Investors may park funds for the medium to long term rewards. 

ABOUT COMPANY:
Shree Karni Fabcom Ltd. (SKFL) is engaged in the manufacturing of technical textiles tailored for diverse industries such as luggage, medical arch support, chairs, shoes, and apparels. Its production process begins with yarn procurement and encompasses weaving, coating, printing, and finishing, resulting in knitted and woven fabrics crafted to meet clients' customized specifications. Specializing in Woven Fabrics, Knitted Fabrics, Coated Fabrics, and 100% polyester, it sources yarn, resin, acrylic, and coating chemicals to produce specialized technical textiles. The Company specialized in converting yarn into fabric through knitting of fabrics. 

SKFL outsources weaving, coating, sizing and embossing of specialized technical textile to its Subsidiary, IGK Technical Textile LLP. Its product applications span a wide spectrum, including luggage, roofing, agriculture net, vehicle covers, tents, armed forces fabric, sports kits, chairs, medical arch support, umbrellas, and raincoats. Its manufacturing unit is equipped with automated machines for manufacturing of specialized technical textile with installed capacity of 70,000 meters per day for weaving, 90,000 kilos per month for knitting, 50,000 meters per day for poly acrylic and polyurethane coating, 15,000 meters per day for PVC / 8,000 meters per day for EVA lamination and 40,000 meters per day heat embossing. 

The company markets and sells under own brand 'SKFL'. It proposes to utilize a portion of the Net Proceeds of this Issue towards setting up of dyeing facility and forward integration for manufacturing of bags at land already purchased in very close vicinity to its existing manufacturing set up. Recently, the Company has acquired 66.67% stake in IGK Technical Textile LLP w.e.f. October 31, 2023, which is engage in weaving, coating, sizing and embossing of specialized technical textile. Its subsidiary operation comprises woven, coating, and embossing facilities.

Its current manufacturing units consists of three facilities - namely, knit facility, PVC/EVA lamination facility, and R&D facility. In addition to this, there are three more facilities in its subsidiary - woven facility, coating facility and embossing facility. The company has a diversified marketing network that serves as a robust channel for the promotion and sale of its products. Operating within a Business-to-Business (B2B) model, it engages with institutional manufacturers and traders located across various states in India. As of November 30, 2023, it had 39 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden book building route IPO of 1872000 equity shares of Rs. 10 each to mobilize Rs. 42.49 cr. at the upper cap. It has announced a price band of Rs. 220 - Rs. 227 per share. The issue opens for subscription on March 06, 2024, and will close on March 11, 2024. The minimum application to be done is for 600 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 26.47% of the post-IPO paid-up Capital of the company. From the net proceeds of the IPO, it will utilize Rs. 30.71 cr. for capex on new dyeing unit at Navsari-Gujarat, Rs. 1.87 cr. for purchase of new machinery for manufacturing bags, Rs. 5.00 cr. for working capital and the rest for general corporate purposes. 

The issue is solely lead managed by Horizon Management Pvt. Ltd., and MAS Services Ltd. is the registrar of the issue. MLB Stock Broking Pvt. Ltd. is the market maker for the company. 

The company has issued initial equity capital at par and has raised further equity at a fixed price of Rs. 147 per share on October 2023. It has also issued bonus shares in the ratio of 4 for 1 in July 2023. The average cost of acquisition of equity shares by the promoters is Rs. 2.00 per share. 

Post-IPO, company's current paid-up equity capital of Rs. 5.20 cr. will stand enhanced to Rs. 7.07 cr. Based on the upper IPO price band, the company is looking for a market cap of Rs. 160.53 cr.  

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has (on a consolidated basis) posted a total revenue/net profit of Rs. 32.90 cr. / Rs. 1.53 cr. (FY21), Rs. 83.65 cr. / Rs. 5.15 cr. (FY22), and Rs. 127.04 cr. / Rs. 5.55 cr. (FY23). For 8M of FY24 ended on November 30, 2023, it earned a net profit of Rs. 8.13 cr. on a total revenue of Rs. 76.00 cr. The sudden boost in bottom line for 8M-FY24 raise eyebrows and concern over its sustainability. According to the management, due to their expansion mode for value added product mix, it marked lower margins for FY23, but not since all needed infrastructure is in place, they are reaping benefits of expansion which is reflected in 8M-FY24 working. This trend will continue with addition of more high margin products in its portfolio with major thrust on bags. Its customer list includes VIP, Samsonite, Bata, Khadim, Flamingo, Tommy Hilfiger, Safari to name a few. 

For the last three fiscals, it has reported an average EPS of Rs. 25.27, and an average RONW of 27.46%. The issue is priced at a P/BV of 6.17 based on its NAV of Rs. 36.77 as of November 30, 2023, and at a P/BV of 2.61 based on its post-IPO NAV of Rs. 87.13 per share (at the upper cap).

If we attribute annualized FY24 earnings to its post-IPO fully diluted paid-p capital, then the asking price is at a P/E of 13.16. Thus the IPO appears reasonably priced.

For the reported periods, the company has posted PAT margins of 4.67% (FY21), 6.16% (FY22), 4.37% (FY23), 10.75% (8M-FY24), and RoCE margins of 16.80%, 19.20%, 21.83%, 11.34% 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 Nobletex Ind. as their unlisted peers. However, they are not comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
This is the 4th mandate from Horizon Management in the last fiscal, out of the last 2 listings, 1 opened at discount and 1 at par. MVK is yet to be listed.

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