Subam Papers BSE SME IPO review (Apply)

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Review By Dilip Davda on September 27, 2024

•    The company is in the business of manufacturing kraft paper and other paper products.
•    It marked inconsistency in its top line as well as the bottom lines.
•    Based on FY24 earnings, the issue appears fully priced.
•    It is operating in a highly competitive and fragmented segment.
•    Investors may park funds for medium to long term.

PREFACE:
The offer document for this issue has few anomalies. It is missing the info on equity dilution data in the RHP, as well as IPO price band ad. It is also missing its post-IPO NAV data in the IPO price band ad. Such lacunas indicate non-transparency in the information related to the issuer. 

ABOUT COMPANY:
Subam Papers Ltd. (SPL) is engaged in the manufacturing of Kraft Paper and Paper Products. Subam started its journey in the year 2004 with manufacturing of paper cones and later expanded the product base by adding Duplex board and Kraft paper in its portfolio. The company is not like the traditional paper manufactures, it does not manufacture products from wood pulp but instead it uses waste paper as raw material. The company aims to preserve mother nature and tend to drive company on the principle of recycling. The company leverages wastepaper as the primary raw material in the production of Kraft Paper and Duplex Board.

SPL is dedicated to sustainability, using recycled paper and cardboard in the production of Kraft Paper and Duplex Board. This not only reduces waste but also underscores its commitment to environmental responsibility. To further minimize environmental impact, it harnesses renewable energy through own wind and solar power installations. Its wind energy infrastructure includes two windmills: with a capacity of 850 KW each totalling approximately 1.7 MW. Additionally, the company operates a solar plant with a capacity of 14 MW. These renewable energy sources enable its manufacturing facilities to significantly reduce their carbon footprint, aligning with its goal of sustainable and eco-friendly operations.

The products it manufactures are used in various industries, including automobiles, textiles, FMCG, food, distilleries, pharmaceuticals, electrical and electronics, printing and more, where packaging is indispensable. Paper products play a pivotal role in packaging across sectors, from biscuit wrappers to marriage invitations, showcasing the versatility and significance of its offerings across diverse industries. As of the date of this offer document, it had 500 employees on its payroll.

According to the management, the company is having many paper products under one roof and is thus enjoying the preference of customers since they get all their needs on kraft paper and paper products at a competitive price from SPL.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden book building route IPO of 6164800 equity shares of Rs. 10 each to mobilize Rs. 93.70 cr. (at the upper cap). It has announced a price band of Rs. 144 - Rs. 152 per share. The issue opens for subscription on September 30, 2024, and will close on October 03, 2024. The minimum number of shares to be applied is for 800 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. The issue constitutes 26.52% of the post-IPO paid-up capital of the company. From the net proceeds of the IPO, the company will utilize Rs. 75.00 cr. for investment in subsidiary for capex requirements, and the rest for general corporate purposes. 

The IPO is solely lead managed by Gretex Corporate Services Ltd., and Bigshare Services Pvt. Ltd. is the registrar to the issue. Gretex Group's Gretex Share Broking Ltd., is the Market Maker for the company. The issue is underwritten 50% each by Gretex Corporate and Gretex Share Broking. 

Having issued initial equity shares at par value, the company issued further equity shares in the price range of Rs. 275 -Rs. 572, in August 2012, and June 2024. It has also issued bonus shares in the ratio of 9 for 1 in June 2024. The average cost of acquisition of shares by the promoters is Rs. 4.65, and Rs. 17.89 per share. 

Post-IPO, company's current paid-up equity capital of Rs. 17.08 cr. will stand enhanced to Rs. 23.24 cr. Based on the upper price band of the IPO, the company is looking for a market cap of Rs. 353.32 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/ - (loss) of Rs. 332.60 cr. / Rs. 24.97 cr. (FY22), Rs. 510.62 cr. / Rs. - (0.68) cr. (FY23), and Rs. 496.97 cr. / Rs. 33.03 cr. (FY24). The fluctuating top and bottom lines has surprised one and all. As per management, following highly volatile pricing of raw materials globally due to geo-political and Ukraine-Russia tussle, it had to suffer a setback for FY23. As the things improved, it got reflected in FY24 performance. 

For the last three fiscals, the company has reported an average EPS of Rs. 12.87 and an average RoNW of 10.95%. The issue is priced at a P/BV of 1.29 based on its NAV of Rs. 122.29 as of March 31, 2024, but the offer document and the IPO price band ad is missing its post-IPO NAV data.

If we attribute FY24 earnings on post-IPO fully diluted equity capital, then the asking price is at a P/E of 10.99, and based on FY23 earnings, the P/E stands at Negative. The issue relatively appears fully priced.

For the reported periods, the company has posted PAT margins of 7.90% (FY22), - (0.05) % (FY23), 6.77% (FY24), and RoCE margins of 12.82%, 5.88%, 20.84% respectively for the referred periods. 

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

COMPARISION WITH LISTED PEERS:
As per the offer document, the company has shown Pakka Ltd., Shree Ajit Pulp as their listed peer. They are trading at a P/E of 29.3 and 25.2 (as of September 27, 2024). However, they are not truly comparable on an apple-to-apple basis.  

MERCHANT BANKER'S TRACK RECORD:
This is the 23rd mandate from Gretex Corporates in the last three fiscals (including the ongoing one).  From the 10 listings so far, 1 opened at discount, and the rest with premiums ranging from 5.83% and 187.36% on the date of listing.

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