Veekayem Fashion NSE SME IPO review (Avoid)

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Review By Dilip Davda on August 1, 2022

•    VFAL is in the textile business which is a highly competitive and fragmented segment.
•    The company is issuing shares to the public at a lower cost compared to the promoter's acquisition costs.
•    It has posted inconsistency in its top and bottom lines for the reported periods. 
•    The issue is fully priced based on its financial performance. 
•    There is no harm in skipping this IPO. 

ABOUT COMPANY:
Veekayem Fashion & Apparels Ltd. (VFAL) is engaged in the business of weaving and garment manufacturing. It is majorly engaged in the business of manufacturing for various brands, however, the company also caters to exports and local markets in customized designs as requested by clients and customers in the textile and apparel industry.

VFAL deals in a range of products like Shirting fabrics, Suiting Fabrics, Trouser fabrics, jacketing fabrics, format trousers, cotton trousers and other accessories etc. Its extensive product portfolio of 100% Cotton - Lycra and Non-Lycra, Giza, Supima, Blended Cotton Suiting - Chief Value Cotton, Polyester Cotton, 100% Cotton Yarn Dyed, Polyester Viscose, Terry Rayon Suiting and Mock Linen. As of the filing of this offer document, it had 825 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its needs for working capital (Rs. 4.00 cr.), general corporate purposes (Rs. 0.01 cr.), VFAL is coming out with a maiden IPO of 1584000 equity shares of Rs. 10 each at a fixed price of Rs. 28 per share to mobilize Rs. 4.44 cr. The issue opens for subscription on August 05, 2022, and will close on August 11, 2022. Minimum application is to be made for 4000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 26.96% of the post-IPO paid-up capital of the company. VFAL is spending Rs. 0.43 cr. for this IPO process. This indicates the structured nature of this IPO.

The issue is solely lead managed by GYR Capital Advisors Pvt. Ltd., KFin Technologies Ltd. is the registrar to the issue and Econo Broking Pvt. Ltd., is the market maker for this IPO. 

Having issued initial equity at par, the company issued further equity shares in the price range of Rs. 90 - Rs. 100 between March 2006 and February 2013. The average cost of acquisition of shares by the promoters is Rs. 74.04, Rs. 74.89 and Rs. 84.98 per share. This is perhaps the first such IPO whereby the new shares are issued at a much lower price compared to the cost of acquisition of shares by the promoters. This appears somewhat fishy as the company does not have documentary evidence for the capital built up prior to IPO. 

Post-IPO, VFAL's current paid-up equity capital of Rs. 4.29 cr. will stand enhanced to Rs. 5.88 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 16.45 cr. 

FINANCIAL PERFORMANCE: 
On the financial performance front, for the last three fiscals, VFAL has posted turnover/net profits of Rs. 215.72 cr. / Rs. 1.09 cr. (FY20), Rs. 76.70 cr. / Rs. 0.35 cr. (FY21) and Rs. 149.47 cr. / Rs. 1.89 cr. (FY22). Thus it has shown inconsistency in its top and bottom lines. Boosted profits on a lower turnover achieved for FY22 appears pre-IPO window dressing. 

For the last three fiscals, VFAL has posted an average EPS of Rs. 2.89 and an average RoNW of 4.08%. The issue is priced at a P/BV of 0.39 based on its NAV of Rs. 72.12 as of March 31, 2022, and at a P/BV of 0.47 based on its post-IPO NAV of Rs. 60.22 per share. 

If we attribute FY22 earnings on post IPO fully diluted equity, then the asking price is at a P/E of around 8.72 making it a fully priced issue. 

COMPARISON WITH LISTED PEERS:
As per the offer document, VFAL has shown Page Ind., Indian Terrain and Monte Carlo. They are currently trading at a P/E of 102.3, 00 and 13.56 (as of August 01, 2022). However, compare with Page Ind. And Monte Carlo is really surprising. They are not truly comparable on an apple-to-apple basis. 

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

MERCHANT BANKER'S TRACK RECORDS:
This is the 5th mandate from GYR Capital in the last two fiscals (including the ongoing one). Out of the last four listings, all listed with a premium ranging from 2.45% to 6.15% on the day of listings. Thus it has an average track record.

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