AB Cotspin NSE SME IPO review (May apply)

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Review By Dilip Davda on December 29, 2021

•    ABCL is engaged in the cotton yarn, knitted fabrics, cottonseed oil business.
•    Its last 15 months working with super earnings raises eyebrows.
•    Sustainability of such margins going forward is a major concern. 
•    Though the issue appears lucratively priced based on super earnings, its average performance makes it a fully priced issue.
•    Risk seeker/cash surplus investors may consider investment for the long term. Others can avoid it.

ABOUT COMPANY:
AB Cotspin Ltd. (ABCL) is primarily engaged in the manufacturing of cotton yarn, knitted fabric, cottonseed oil and oilcakes. It commenced its business in 1997 with a cotton ginning plant with cotton bales and cotton seeds being initial products. Thereafter in the year 2000, it installed a crushing unit to extract oil from cotton and mustard seeds and expanded the product basket with the addition of cottonseed oil, mustard oil and oil cake. 

In the year 2011, ABCL ventured into manufacturing cotton yarn by setting up a spinning plant. In the year 2014, the company installed a knitting machine and thus forayed into the manufacturing of knitted fabric. As of the date of the RHP, it has installed 18,000 spindles for manufacturing cotton yarn, 441 mt p.a. for knitted fabric and 6,750 mt p.a. for seed oil/oilcake. As of June 30, 2021, it had 255 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its needs for working capital (Rs. 7.75 cr.) and general corporate purpose funds, ABCL is coming out with a maiden public issue via a book building route. The company will be issuing 2884000 equity shares of Rs. 10 each with a price band of Rs. 33 - Rs. 35 to mobilize Rs. 10.09 cr. (at the upper cap). The issue opens for subscription on December 30, 2021, and will close on January 03, 2022. Minimum application is to be made for 4000 shares and in multiples thereon, thereafter. The issue constitutes 28.02% of the post issue paid-up capital of the company. 

The issue is solely lead managed by Pantomath Capital Advisors Pvt. Ltd. and Link Intime India Pvt. Ltd. is the registrar to the issue. Pentagon Stock Brokers Pvt. Ltd. (erstwhile known as Pantomath Stock Brokers Pvt. Ltd.)  is acting as a market maker for this issue. 

Having issued initial equity at par, the company raised further equity in the price range of Rs. 50 to Rs. 100 between December 2010, and December 2012. The company that proposed rights shares at Rs. 90 per share finally settled the price at Rs. 50 per share and forfeited Rs. 40 per share which were to be received under the first call. The company has also issued bonus shares in the ratio of 2 for 1 in May 2021. The average cost of acquisition of shares by the promoters is Rs. 12.80 and Rs. 12.90 per share. 

Post issue, ABCL's current paid-up equity capital of Rs. 7.41 cr. will stand enhanced to Rs. 10.29 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 36.02 cr. (at the upper price band). 

FINANCIAL PERFORMANCE: 
On the financial performance front, for the last three fiscals, ABCL has posted turnover/net profits of Rs. 121.06 cr. / Rs. 1.33 cr. (FY19-On proforma basis), Rs. 94.28 cr.  / Rs. 0.76 cr. (FY20) and Rs. 115.57 cr. / Rs. 3.88 cr. (FY21). For the first three months of FY22 ended on June 30, 2021, it has earned a net profit of Rs. 3.32 cr. on a turnover of Rs. 30.53 cr.  The sudden boost in bottom lines for the last 15 months appears to be the window dressings to lure investors and get better valuations. Particularly the Q1 of FY22 net is raising eyebrows. 

If we annualize super Q1-FY22 earnings and attribute it on fully diluted post issue equity capital, then the asking price is at a P/E of 2.71 and on the basis of FY21 earnings, it comes to 9.28. Thus though its offer price appears tempting, the sustainability of such margins going forward is a major concern. Its FY19 and FY20 performances were average. Based on the last three years' average EPS the asking price is at a P/E of 10.74.

For the last three fiscals, ABCL has posted an average EPS of Rs. 3.26 and an average RoNW of 13.17%. The issue is priced at a P/BV of 1.03 based on its NAV of Rs.34.05 as of June 30, 2021, and at a P/BV of 1.02 based on its post-issue NAV of Rs. 34.32 (at the upper cap). 

COMPARISON WITH LISTED PEERS:
As per offer documents, ABCL has shown Amarjothi Spg., Suryalata Spg., Salona Cotspin and Pashupati Cotspin as its listed peers. They are currently trading at a P/E of 8.13, 3.81, 6.48 and 23.2 (as of December 29, 2021). However, they are not truly comparable on an apple-to-apple basis. 

DIVIDEND POLICY: 
The company has not paid any dividend for the reported periods of 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 seventh mandate from Pantomath Capital in the last three fiscals (including the ongoing one). It remained dormant for FY20-21. Out of the last 10 mandates, 1 opened at discount, 1 at par and the rest at premiums ranging from 2.12% to 19.23%on the day of listings.

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