Vruddhi Engg. BSE SME IPO review (Avoid)

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Review By Dilip Davda on March 21, 2024

•    VEWL is in the business of trading and supplying TMT bars and rebar couplers.
•    It operates on a third party job contract basis and does not have its own unit.
•    It posted sudden boost in its top and bottom lines from FY23 onwards.
•    Very small equity base post IPO indicates longer gestation for migration to main board.
•    There is no harm in skipping this aggressively priced issue. 

PREFACE:
The company originally planned to open the IPO on March 21, 2024, and made public announcement. But surprisingly, the offer documents were not uploaded on the designated exchange till the late eve of March 20, 2024. According to LM, due to revised extended time for uploads by the exchange, it got delayed and hence the issue timing shifted for a time line of March 26 - March 28, 2024. While the blame game is on, the confusion prevailed among the investors across the board and it turned talk of the town. The procedural hitches are to be taken into consideration and the concerned parties should ensure that such things are not repeated in future. The documents could not be traced on the designated exchange till the eve of March 21, 2024, though IPO ad for revised timeframe was published on the same day.

ABOUT COMPANY:
Vruddhi Engineering Works Ltd. (VEWL) is mainly engaged in offering mechanical splicing solutions to the real estate, construction and infrastructure industry by designing, engineering and supplying of rebar couplers. The Company's offering under this vertical includes (a) supply of rebar couplers as per customer needs; (b) on-site threading services of the couplers; and (c) trading in threading machines and spares. The Company believes that it offers an end-to-end mechanical splicing solutions ranging from design, manufacturing, testing, logistics and rebar threading. The rebar couplers offered by VEWL is considered as an alternative to the conventional splicing methods followed in the construction industry.

The Company supplies and provides its mechanical splicing solutions to construction contractors, real estate developers and infrastructure companies. It supplies rebar couplers in the domestic market. As the Company primarily caters to the construction industry, with an objective to expand its product offerings the company acquired the running business of the proprietorship concern of Promoter namely, "M/s. Kosmo Ventures", along with the assets and liabilities of the proprietorship concern as going concern. Kosmo Ventures was engaged in the business of trading of reinforcement bars (TMT bars) and machinery. The acquisition was completed on January 31, 2023 and since then, our Company has expanded into the business of trading of reinforcement bars (TMT bars) and machinery as a trader and service provider. 

The products supplied by the Company i.e. rebar couplers and Steel Products finds its application with construction contractors, real estate developers and infrastructure companies and are used in the construction of residential and commercial buildings, steel structures, roads, etc. The Company designs and engineers the rebar couplers as per the customer's requirement and is manufactured by a third-party manufacturer. As of September 30, 2023 it served around 81 (eight one) customers in the mechanical splicing vertical and in the trading of Steel Products. As of December 31, 2023, it had 41 employees on its payroll.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden book building route IPO worth Rs. 4.76 cr. of 680000 equity shares of Rs. 10 each (at the upper cap). It has announced a price band of Rs. 66 - Rs. 70 per share. The issue opens for subscription on March 26, 2024, and will close on March 28, 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 26.95% of the post-IPO paid-up capital of the company. From the net proceeds of the IPO, it will utilize Rs. 2.60 cr. for working capital, and the rest for general corporate purposes. 

The issue is solely lead managed by Fedex Securities Pvt. Ltd., and Bigshare Services Pvt. Ltd. is the registrar of the issue. Rikhav Securities Ltd. is the market maker for the company. 

Having issued initial equity capital at par value, the company issued further equity shares in the price range of Rs. 75 - Rs.168.11 per share between November 2022 and April 2023. It has also issued bonus shares in the ratio of 15 for 1 in April 2023. The average cost of acquisition of shares by the promoters is Rs. 4.94 per share. 

Post-IPO, company's current paid-up equity capital of Rs. 1.84 cr. will stand enhanced to Rs. 2.52 cr. Based on the upper IPO price band, the company is looking for a market cap of Rs. 17.67 cr.  

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has posted a total revenue/net profit/ - (loss) of Rs. 0.004 cr. / - (0.01) cr. (FY21), Rs. 2.21 cr. / Rs. 0.09 cr. (FY22), Rs. 13.10 cr. / Rs. 0.75 cr. (FY23). For H1 of FY24 ended on September 30, 2023, it earned a net profit of Rs. 0.41 cr. on a total revenue of Rs. 9.35 cr. Thus it turned the corner in FY22 and marked boost in its top and bottom lines from FY23 onwards. 

For the last three fiscals, it has reported an average EPS of Rs. 9.46, and an average RONW of - (71.55) %. The issue is priced at a P/BV of 5.10 based on its NAV of Rs. 13.73 as of September 30, 2023, and at a P/BV of 2.42 based on its post-IPO NAV of Rs. 28.89 per share (at the upper cap).

If we attribute annualized FY24 earnings to its post-IPO fully diluted paid-up capital, then the asking price is at a P/E of 21.54. And based on FY23 earnings, it is at a P/E of 23.41. Thus the issue appears aggressively priced. 

For the reported periods, the company has posted PAT margins of - (197.20) % (FY21), 4.28% (FY22), 5.76% (FY23), 4.38% (H1-FY24), and RoCE margins of - (37.53) %, 22.26%, 21.57%, 15.53% respectively for the referred periods. 

DIVIDEND POLICY:
The company has not declared any dividends since incorporation. 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 Shiv Aum Steels, and SRU Steels, as their listed peers. They are trading at a P/E of 39.0 and 16.2 (as of March 21, 2024). However, they are not comparable on an apple-to-apple basis.

MERCHANT BANKER'S TRACK RECORD:
This is the 29th mandate from Fedex Securities in the last four fiscals, out of the last 11 listings, 1 opened at discount, and the rest opened with premiums ranging from 1.67% to 140.82% on the day of listing.

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