Sunrise Efficient BSE SME IPO review (Avoid)

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Review By Dilip Davda on March 27, 2022

•    SEML is engaged in the business of trading and distribution.
•    Its financial performance post corporatization is surprising.
•    The issue is fancily priced based on its super earnings for H1 FY22.
•    Post IPO equity indicates longer gestation for migration to the mainboard.
•    There is no harm in skipping this tempting issue. 

ABOUT COMPANY: 
Sunrise Efficient Marketing Ltd. (SEML) is an ISO 9001:2015 certified Company primarily engaged in the business as traders, distributors, super stockiest, retailers, wholesalers, importers, exporters, agents, dealers, buyers, sellers, fabricators, assemblers, fitters, installers, repairers of all types of industrial machinery, its spare parts, electrical items, electronic items, mechanical and engineering items, pipes, pipe fittings, sanitation parts, all types of machined and un-machined castings, industrial valves and its spares, Oils, lubricants, all types of motors, pumps, generator sets, batteries and all types of electrical, mechanical, electromechanical & electronic items, and spare parts, accessories used for industrial, domestic and agricultural purposes. 

It is also a distributor for FMCG products. Subsequently, the Company has acquired the business comprising of the distribution agreement, customer relationship, employees and brands of M/s Sunrise Marketing and Services w.e.f. July 24, 2020. As of the date of filing of the offer document, it had 53 employees on its payroll. It is operating the business from leased properties.  

ISSUE DETAILS/CAPITAL HISTORY: 
To part finance its need for working capital (Rs. 11.19 cr.) and general corporate purpose (Rs.4.17 cr.), SEML is coming out with a maiden IPO of 1380000 equity shares of Rs. 10 each at a fixed price of Rs. 121 per share to mobilize Rs. 16.70 cr. The issue opens for subscription on March 30, 2022, and will close on April 05, 2022. Minimum application is to be made for 1000 shares and in multiples thereof, thereafter. Post allotment, shares will be listed on BSE SME. The issue constitutes 27.60% of the post-IPO paid-up capital of the company. SEML is spending Rs. 1.34 cr. for this IPO process. This indicates the arrangement of funding for the subscription of the issue is already done.

The issue is solely lead managed by Fedex Securities Pvt. Ltd. land KFin Technologies Pvt. Ltd. is the registrar to the issue. Rikhav Securities Ltd. is the market maker for this company. 

Having issued initial equity shares at par, the company issued further equity shares at Rs. 121 per share in March 2022 and has also issued bonus shares in the ratio of 2.13 for 1 in the same month. The average cost of acquisition of shares by the promoters is Rs. 35.25 per share. 

Post-IPO, SEML's current paid-up equity capital of Rs. 3.62 cr. will stand enhanced to Rs. 5.00 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 60.50 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, post-conversion to a public limited entity, the company has posted a turnover/net profits of Rs. 26.1 cr. / Rs. 0.18 cr. (FY21) and for the first half of FY22 ended on September 30, 2021, it has earned a net profit of Rs. 3.12 cr. on a turnover of Rs. 30.07 cr. Thus super margins and bumper profits in IPO year appears to be the window dressing for fancy valuations. 

Before conversion to a corporate entity, it posted turnover/net profit of Rs. 39.59 cr. / Rs. 0.06 cr. (FY19), Rs. 41.90 cr. / Rs. 0.37 cr. (FY20) and Rs. 21.83 cr. / Rs. 0.75 cr. (FY21). With inconsistency in the top line, it posted higher profits and margins which are really surprising. 

For FY21 it has reported an EPS of Rs. 0.61 and for the first half of FY22, it stood at 9.68 (not annualized). These super earnings for FY22 first half appear as an eyewash. For the same periods, its RoNW stood at 15.52% and 72.52% respectively. The issue is priced at a P/BV of xx based on its NAV of Rs. 13.77 as of September 30, 2021. It has not given data for post-IPO NAV. 

If we annualize FY22 earnings and attribute it to the fully diluted post IPO equity, then the asking price is at a P/E of 9.70 and thus it turns into an appealing offer. But if we apply FY21 earnings then the P/E stands at 336. Thus the issue is exorbitantly priced on the basis of FY21 earnings. The sustainability of margins shown by this company for FY22 so far appears to be unrealistic considering the type of business it handles when the segment is highly competitive and fragmented. 

DIVIDEND POLICY:
The company has not declared any dividend 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, SEML has no listed peers to compare with. 

MERCHANT BANKER'S TRACK RECORDS:
This is the 12th mandate from Fedex Securities in the last three fiscals. Out of the last 10 listings, 2 opened at par and the rest with premiums ranging from 0.008% to 16.67% on the day of listings.

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