Three M Paper BSE SME IPO review (May apply)

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Review By Dilip Davda on July 10, 2024

•    The company is engaged in recycled paper based duplex board products manufacturing.
•    It reported steady growth in its top and bottom lines from FY21 to FY23.
•    The bumper profits for FY24 on declined top line raises eyebrows and concern over its sustainability going forward.
•    Based on FY24 super earnings, the issue appears fully priced discounting all near term positives. 
•    Well-informed investors may park moderate funds for medium term. 

ABOUT COMPANY:
Three M Paper Boards Ltd. (TMPBL) is engaged in the business of manufacturing recycled paper-based Duplex Board products used in various packaging applications across industries such as food and beverage, pharmaceuticals, cosmetics, and consumer goods and supplies its high-quality duplex board paper products in both the domestic and international markets. Its products are made out of 100 percent recycled waste paper and are completely biodegradable. 

The company sets out to undertake various innovations in both the product-development side as well as in manufacturing processes on a consistent basis. The company is headquartered in Mumbai, with its manufacturing facility located in Chiplun, Dist. Ratnagiri, Maharashtra. Equipped with state-of-the-art machines and ultra-modern technologies in its manufacturing facility, the company had a total manufacturing capacity of 72,000 TPA paper at the close of FY 2023-24.

Considering the present per capita paper consumption in India, the company sees a sea of opportunity lying ahead. With the growing importance of e-commerce businesses, rising literacy rates, and growing FMCG, packaged food, and stationery industries, the days ahead for the Indian paper industry are expected to be phenomenal, as the Indian paper industry is likely to outpace the global industry in terms of growth. Despite increasing digitization, the Indian paper industry is expected to clock double-digit growth over the next five years. Moreover, there are significant changes in the policies for Chinese raw material imports, which have restricted their own production and curtailed their imports of some of the waste paper varieties, which has had a positive impact on the Indian waste paper-consuming mills. Looking at all these factors, the company is quite bullish about the paper industry for the coming years. The company's performance is derived from its strategic focus to be a low-cost paper manufacturer with a growing systemic integration of new technologies and processes. As of March 31, 2024, it had 233 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden book building route IPO of 5772000 equity shares of Rs. 10 each to mobilize Rs. 39.83 cr. at the upper cap. It has announced a price band of Rs. 67 - Rs. 69 per share. The issue opens for subscription on July 12, 2024, and will close on July 16, 2024. The minimum application to be made is for 2000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. The issue constitutes 30% of the post-IPO paid-up capital of the company. From the net proceeds of the IPO, it will utilize Rs. 14.00 cr. for capex on installation of new machinery, modernization of existing facility and installation of plastic fired low pressure boilers, Rs. 10.00 cr. for working capital, Rs.  7.00 cr. for repayment/prepayment of certain borrowings, and Rs. 6.00 cr. for general corporate purposes. 

The issue is solely lead managed by Comfort Securities Ltd., and Bigshare Services Pvt. Ltd. is the registrar to the issue. Comfort Securities Ltd. is also the market maker for the company. 

Having issued/on the basis of Rs. 10 FV) between March 2013 and December 2023. It has also issued bonus shares in the ratio of 1 for 1 in February 2024. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 4.25, Rs. 6.41, and Rs. 6.97 per share. 

Post-IPO, company's current paid-up equity capital of Rs. 13.47 cr. will stand enhanced to Rs. 19.24 cr. Based on the upper IPO price band, the company is looking for a market cap of Rs. 132.74 cr.  

FINANCIAL PERFORMANCE:
On the financial performance front, for the last four fiscals, the company has posted a total income/net profit of Rs. 165.52 cr. / Rs. 1.73 cr. (FY21), Rs. 316.01 cr. / Rs. 3.28 cr. (FY22), Rs. 329.49 cr. / Rs. 6.62 cr. (FY23), and Rs. 272.24 cr. / Rs. 11.35 cr. (FY24). The sudden boost in its bottom lines for FY23 and FY24 raises eyebrows and concern over its sustainability going forward.

For the last three fiscals, it has reported an average EPS of Rs. 6.40, and an average RoNW of 15.26%. The issue is priced at a P/BV of 1.52 based on its NAV of Rs. 45.38 as of March 31, 2024, but post-IPO NAV data is missing from IPO price-band ad.

If we attribute FY24 earnings to its post-IPO fully diluted paid-up capital, then the asking price is at a P/E of 11.70, and based on FY23 earnings, P/E stands at 20.06. Thus the issue appears fully priced. 

For the reported periods, the company has posted PAT margins of 1.04% (FY21), 1.04% (FY22), 2.01% (FY23), 4.11% (FY24), and RoCE margins of 12.13%, 12.93%, 15.44%, 19.71% 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 N R Agarwal, Kuantum Papers, and Shree Ajit Pulp, as their listed peers. They are trading at a P/E of 6.67, 8.27 and 14.8 (as of July 10, 2024). However, they are not comparable on an apple-to-apple basis.

MERCHANT BANKER'S TRACK RECORD:
This is the 1st mandate from Comfort Securities in the ongoing fiscal and has no track records for its past mandates.

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