Supreme Engineering NSE SME IPO review (May apply)

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Review By Dilip Davda on August 17, 2018

•    SEL is well diversified company with firm contracts from defense and aviation sectors
•    Raising additional buffer from land bank development.
•    Issue is at lower than pre-IPO placement price.
•    Financial track record indicates future prospects.
•    LM’s track record is non-encouraging.

ABOUT COMPANY
Supreme Engineering Ltd. (SEL) is engaged in the business of manufacturing special alloys and special wire products. It has two manufacturing units, Unit I being the Special Steels division, located at Khopoli, and engaged with the manufacturing of special alloys such as super alloys, precipitation hardening steels, martensitic stainless steel, austenitic stainless steel, ultra high strength steel and high speed steels which have their end use in sectors such as aerospace, space, defense, nuclear power thermal power, oil & gas, and heavy engineering; and Unit II being the Wire division, located at Rabale, Navi Mumbai, engaged with the manufacturing of wires, bright bars, fine wires and profiles. These products find their end use in sectors such as automotive, oil & gas, industrial machinery and hand tools industries.

Company’s Special steels division is equipped with advanced technology such as Vacuum Induction Melting (VIM), Argon Oxygen Decarburization (AOD), Electro-slag Refining (ESR), Radial Forging Machine, Rolling Mill, Heat treatment furnaces, bright bar plant & machine shop for manufacturing special alloys. Manufacturing facilities at the wire division include heat-treatment furnaces, coil to coil peeling machines, drawings machines, bright bar plant and cold-rolling facilities. SEL’s units have been approved by various Defense Public Sector Undertakings, Public Sector Undertakings, Ordnance factories and undertakings belonging to aerospace, automotive and energy sectors. Company’s special steel products are import substitutes and a part of the initiatives taken by public sector undertakings. Since its products form an integral part of the critical end use equipment manufactured for defense, power and aerospace industries, company maintains the high qualitative standards as required by these industries. Both the manufacturing units have strong quality management systems certified by ISO 9001.

Company is developing its land bank near its Khopoli plant location for business/ residential premises and expects to generate Rs. 20.22 cr. from these developments. It will use this fund for its proposed debt reduction and expansion/up gradation plans.

ISSUE DETAILS/CAPITAL HISTORY
To part finance its plans for repayment of high cost debts (which was Rs. 11.21 cr. as on 30.04.18), capital expenditure for up gradation and acquisition of plant and machinery, working capital and general  corpus fund needs,   SEL is coming out with a maiden IPO of 6584000 equity shares of Rs. 10 each via book building issue. It has fixed a price band of Rs. 27- Rs. 32 and mulls mobilizing Rs. 17.78 cr. to Rs. 21.07 cr. based on lower and upper price bands. Issue comprises offer for sale of 8000 shares and fresh equity issue of 6576000 shares. Issue opens for subscription on 24.08.18 and will close on 29.08.18. Minimum application is to be made for 4000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. Issue constitutes 26.34% of the post issue paid up capital of the company. Issue is solely lead managed by CKP Financial Services Pvt. Ltd. and Bigshare Services Pvt. Ltd. is the registrar to the issue. Having issued initial equity at par between March 1987 and September 2017 it also issued bonus in the ratio of 1 for 1 in December 1995 and 3 for 1 in Sept. 2017. It raised fresh equity (419000 shares)at a price of Rs. 39 per share in February 2018. Thus the public issue is priced below that as a gesture of goodwill. Average cost of acquisition of shares by the promoters is Rs. 2.94, Rs. 3.70 and Rs. 4.02 per share. Post issue, its current paid up equity capital of Rs. 18.42 cr. will stand enhanced to Rs. 25.00 cr.

FINANCIAL PERFORMANCE:
On performance front, for last four fiscals, SEL has posted turnover/net profits of Rs. 79.60 cr. / Rs. 0.74 cr. (FY15), Rs. 113.65 cr. / Rs. 1.12 cr. (FY16), Rs. 120.86 cr. / Rs. 2.15 cr. (FY17) and Rs. 152.26 cr. / Rs. 4.65 cr.  (FY18). For last three fiscals it has posted an average EPS of Rs. 2.30 and an average RoNW of 13.58%. Issue is priced at a P/BV of 2.03 (at upper price band) on the basis of its NAV of Rs.15.76 as on 31.3.18. If we consider FY18 earnings and attribute it on fully diluted equity post issue then asking price is at a P/E of around 17 that makes it reasonably priced against industry composite of 29 plus. As per offer documents, it has shown Mishra Dhatu (Midhani) and Bharat Forge as its listed peers that are currently trading at a P/Es of around 19 and 35 (as on 17.08.18). Midhani can be considered its nearer peer. For last five fiscals, SEL has posted CAGR of 18.87% for revenue and 122.46% for PAT.

For the current financial year 2018-19, SEL has a strong order book of orders in hand and also have sent quotes for tenders from such undertakings in the aerospace, defense and nuclear & power sectors. SEL already has orders on hands worth Rs. 3.81 cr. for Aerospace, Rs. 5.03 cr. for Defense and Rs. 11.69 cr. for Nuclear & Power. It has already submitted bids for all these three sectors respectively for Rs. 16.71 cr., Rs. 1.63 cr. and Rs. 6.93 cr.

MERCHANT BANKER’S TRACK RECORD:
On merchant banker’s front, this is the second mandate from its stable and the only listing of Kapston opened at a premium of just 0.54% on the day of listing. Thus merchant banker’s track record is non-encouraging. In fact as per original draft prospectus, this issue was lead managed by Keynote and CKP, but now it has only one lead manager i.e. CKP. 

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