Virtuoso Opto BSE SME IPO review (May apply)

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Review By Dilip Davda on August 30, 2022

•    VOL is a manufacturer and assembler of consumer durables goods.
•    It marked steady growth in its top and bottom lines for the last 3 fiscals.
•    Groups listed entity Starlite has pus dismal performance on BSE.
•    Super earnings in FY23 Q1 raise eyebrows and look fishy. 
•    Based on super Q1 numbers the issue is lucratively priced, but based on FY22 earnings, it is aggressively priced.
•    Risk seeker/cash surplus investors may consider parking of funds.

PREFACE:
This group's listed entity Starlite Components Ltd. has put a dismal performance on BSE and currently quoting around a 50% discount to its par value. This company's financial performance is non-convincing, particularly the Q1 of FY23 performance crossing FY22 full year's earnings in the first three months itself. There appears to be some window dressing because of which this issue appears attractively priced. If we calculate P/E on the basis of FY22 earnings, then the issue is aggressively priced. Its comparison with Dixon and Amber as listed peers also raises eyebrows. 

ABOUT COMPANY: 
Virtuoso Optoelectronics Ltd. (VOL) manufactures consumer durables goods and assembles a wide array of products and provides end-to-end product solutions. It serves under both "Original Equipment Manufacturers" (OEM) and "Original Design Manufacturers" (ODM) business models. Under the OEM model, it manufactures and supplies products basis designs developed by customers, who then further distribute them under their brand names. Under the ODM model, in addition to manufacturing, VOL conceptualize and design the products that are marketed by them under their brands. ODM capabilities are catering to lighting products and small appliance segments. 

Its current product portfolio includes split air conditions, water heaters, LED lighting products, and other miscellaneous products related to the existing basket. 

As of June 30, 2022, it had 98 permanent employees and also employed around 135 contract labours/interns at its manufacturing facilities.

Group company Starlite Components Ltd. - a thinly traded listed entity at BSE is currently under Corporate Insolvency Resolution Process. This counter is under GSM - Stage 0 and IRP - Stage 0. With low volume, it was last quoted at Rs. 4.71 (Rs. 10 FV) - as of August 30, 2022. 

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its needs for working capital (Rs. 20.40 cr.) and general corporate purposes (Rs. 6.79 cr.), VOL is coming out with a maiden IPO of 5400000 equity shares of Rs. 10 each at a fixed price of Rs. 56 per share. The company mulls raising Rs. 30.24 cr. with this IPO. The issue opens for subscription on September 02, 2022, and will close on September 07, 2022. 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 26.49% of the post-issue paid-up equity capital of the company. VOL is spending Rs. 3.05 cr. for this IPO process. Such heavy spending indicates a structured process for IPO funding in advance. 

The issue is solely lead-managed by Fedex Securities Pvt. Ltd. and Cameo Corporate Services Ltd. is the registrar to the issue. Gretex Share Broking Pvt. Ltd. is the market maker for this company. 

Having issued initial equity shares at par, VOL issued/converted further equity in the price range of Rs. 12 to Rs. 325 per share between March 2018 and January 2022. It has also issued bonus shares in the ratio of 6 for 1 in October 2021. The average cost of the acquisition of shares by the promoters is Rs. 7.92 per share. 

Post-IPO, VOL's current paid-up equity capital of Rs. 14.98 cr. will stand enhanced to Rs. 20.38 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 114.14 cr. 

FINANCIAL PERFORMANCE: 
On the financial performance front, for the last three fiscals, VOL has reported turnover/net profits of Rs. 68.39 cr. / Rs. 1.41 cr. (FY20), Rs. 115.51 cr. / Rs. 2.08 cr. (FY21) and Rs. 200.28 cr. / Rs. 3.94 cr. (FY22). For the first quarter of FY23, it earned a net profit of Rs. 4.12 cr. on a turnover of Rs. 74 cr. Thus it has posted steady growth in its top and bottom lines for the reported periods. Q1 net earnings crossing the entire FY22 raises eyebrows.

For the last three fiscals, it has posted an average EPS of Rs. 2.36 and an average RoNW of 16.56%. The issue is priced at a P/BV of 3.31 based on its NAV of Rs. 16.94 as of June 30, 2022, and at a P/BV of 2.05 based on its post-issue NAV of Rs. 27.29 per share. 

If we annualize FY23 earnings and attribute it to a post-IPO fully diluted equity base, then the asking price is at a P/E of 6.92 making it a lucratively priced offer. But around 10% of spending for the IPO process raises eyebrows and concerns. Is there any window dressing in its financial data for Q1 of FY23? Its results for FY21 also did not reflect any impact of the pandemic. 

Based on its FY22 earnings, the issue is priced at a P/E of 29.02 on a post-issue fully diluted equity base. 

COMPARISON WITH LISTED PEERS:
As per offer documents, VOL has shown Dixon Techno and Amber Enterprises as their listed peers. They are currently trading at a P/E of 137.5 and 139.4 (as of August 30, 2022). This comparison with giant players raises eyebrows. However, they are not truly comparable on an apple-to-apple basis.

DIVIDEND POLICY:
The company has not declared/paid any dividend since incorporation. It will adopt a prudent dividend policy post listing, based on its financial performance and future prospects.  

MERCHANT BANKER'S TRACK RECORD:
This is the 11th mandate from Fedex Securities in the last three fiscals (including the ongoing one). Out of the last 10 listings, 3 opened at par and the rest with a premium ranging from 0.08% to 5.00% on the day of listing. Thus it has a poor track record.

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