Sonalis Consumer BSE SME IPO review (Avoid)

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Review By Dilip Davda on June 5, 2023

•    SCPL is in the business of a variety of Appetite Foods and trading in agro products.
•    After listless performance under the partnership firm, it marked super performance for 9M FY23. 
•    Based on FY23 super earnings, the issue appears lucratively priced. 
•    It operates in a highly competitive and fragmented segment. 
•    There is no harm in skipping this "High Risk/No Return" bet. 

PREFACE:
It is highly surprising that time and again, we have an IPO for BSE SME listing from a company that just started in 2020 and reported a working of just xx months so far. It appears that the financial data is with window dressing to pave the way for fancy pricing. Even the promoters have issued/converted shares at the same price, which is nothing but an eyewash. What is more surprising, is that this company filed its first draft prospectus in January 2023, refiled it in March 2023 and submitted a fresh draft prospectus in April 2023. Now finally it is going public but till June 04.06.23, up to 08.25 hrs., a final prospectus was not made available either on the exchange website or on the website of the Lead Manager as well as on the website of the company (www.appetitefood.in). This is really surprising and raises concern as the company published its IPO opening ad on June 01, 2023. My request mail remained unanswered till xx hrs. of June 04, 2023. Even a request on call to Lead Manager for offer documents though assured of immediate sharing did not happen till this time.

Such types of document approvals are mostly happening on BSE SMEs, who are perhaps after quantity against the quality of the issues. Entry of May 31, 2023, under the DRHP page of SME IPOs, Sonalis uploaded the April 23 draft prospectus only but informed that it is the final one and surprisingly this document did not have the dateline of the IPO. However, the final prospectus could be traced at noon on June 05, 2023, on BSE Website. Response to my email also received this eve with a copy of the final prospectus. 

ABOUT COMPANY:
Sonalis Consumer Products Ltd. (SCPL) is incorporated on March 15, 2022, and its earlier track record is as a partnership firm under the name and style as "Appetite Food" and the products were sold under the branch name of "Appetite Food". The diversified product portfolio of SCPL includes Granola Bar, Laddu, Chakli, Chivda, Sev, etc. 

SCPL manufactures a range of products under the private labelling arrangement and contract manufacturing arrangements with its customers and also trades in Agro products. As of the date of filing this offer document, it had 9 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden IPO of 944000 equity shares of Rs. 10 each at a fixed price of Rs. 30 per share to mobilize Rs. 2.83 cr. The issue opens for subscription on June 07, 2023, and will close on June 09, 2023. The minimum application to be made is for 4000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. The issue constitutes 47.22% of the post-IPO paid-up capital of the company. SCPL is spending Rs. 0.38 cr. for this IPO process, and from the net proceeds, it will utilize Rs. 1.80 cr. for working capital and Rs. 0.65 cr. for general corporate purposes. 

Expert Global Consultants Pvt. Ltd. is the sole lead manager and Purva Sharegistry (India) Pvt. Ltd. is the registrar of the issue. Beeline Broking Ltd. is the market maker for the company. 

Having issued initial equity shares at par, it issued/converted further equity shares at a price of Rs. 30 per share between July 2022 and September 2022. This conversion/issue at a premium is nothing but an eyewash to win investors' confidence. The average cost of acquisition of shares by the promoters is Rs. 25.42 per share. 

Post IPO- SCPL's current paid-up equity capital of Rs. 1.06 cr. will stand enhanced to Rs. 2.00 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 6.00 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, as per restated financial data, for the last two fiscals, SRPL has posted a turnover/net profit of Rs. Rs. 0.06 cr. / Rs. 0.004 cr. (FY21), Rs. 0.93 cr. / Rs.0.008 cr. (FY22), and for 9M of FY23, it earned a net profit of Rs. 0.68 cr. on a turnover of Rs. 4.20 cr. (all these data relate to Appetite Food - a division of SCPL). Its EBITDA margins were 11.96% (FY21), 1.44% (FY22), and 22.06% (9M-FY23), while its PAT margins were 7.14% (FY21), 0.88% (FY22) and 16.28% (9M-FY23). Thus it marked high volatility and inconsistency in its margins data. 
 
However, as per offer documents, it has shown its EPS and RoNW data based on its 9M FY3 performance with an EPS of Rs. 10.08 and an average RoNW of 19.60%. The issue is priced at a P/BV of 0.91 based on its NAV of Rs. 33.10 as of December 31, 2022, and at a P/BV of 0.95 based on a post-IPO NAV of Rs. 31.64 per share. 

If we annualize its super earnings of 9M -FY23 and attribute it to post-IPO, fully diluted paid-up equity capital, then the asking price is at a P/E of 6.56. Thus, though it appears lucratively priced, the sustainability of such margins amidst rising competition from many big FMCGs as well as the segment being fragmented, this issue can be termed as a "High Risk/No Return" bet. 

DIVIDEND POLICY:
The company has not declared any dividends since incorporation. It will adopt a prudent dividend policy post-listing, based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per the offer document, the company has surprisingly shown DFM Foods, Nakoda Group, Prataap Snacks, and Annapurna Swadisht as their listed peers. They are currently trading at a P/E of NA, 83.35, 93.21, and 57.01 (as of June 05, 2023). However, they are not genuinely comparable on an apple-to-apple basis. These tempting peers' comparison is nothing but an eyewash.

MERCHANT BANKER'S TRACK RECORD:
This is the 3rd mandate from Expert Global in the last two fiscals (including the ongoing one). Out of the last 2 listings, 1 opened at a discount and 1 with a premium of 10.47% on the date of listing. 

Sonalis Consumer Products IPO FAQs