Ashapuri Gold Orna FPO review (Avoid)

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Review By Dilip Davda on March 2, 2021

•    The company is engaged in the manufacturing and wholesale trading of jewellery.
•    For the last three fiscals financial data shows the average performance of the company.
•    The issue is exorbitantly priced based on FY2020 full-year performance.
•    The company has changed the Lead Manager and Market Maker for this FPO.

PREFACE:
Ashapuri Gold Ornaments Ltd. (AGOL) came with its maiden Initial Public Offer (IPO) in the month of March 2019 at a fixed price of Rs. 51 per share to mobilize Rs. 29.33 cr. The issue got a 1.16-time subscription.  At that time the Lead Manager was Fedex Securities Ltd., and the Market Maker was NNM Securities Pvt. Ltd. Now within a time frame of two years, the company is coming with Follow-on Public Offer (FPO) with the change of guards i.e. this time the Lead Manager is Mehta Integrated Finance Ltd. and the market maker is Beeline Broking Ltd. For FPO, AGOL is asking a fixed price of Rs. 81 per share to mobilize Rs. 30.02 cr. The scrip then (in 2019) got listed at discount and after moving both ways, it finally closed at par for IPO listing. For both the issues, the concerned Market Maker agreed to higher underwriting commitments.

If we consider faring of SME FPOs post listings so far like MRSS, Meera Industries, it would be a pre-cursor for staying away from such exorbitantly priced issues.

ABOUT COMPANY:
AGOL is engaged in the business of wholesale trading of Jewellery till March 2019. The Jewelries manufactured on Job-work basis at Ahmedabad and Rajkot. The design of its products is done either in house or by third parties on the company's behalf and get the Jewelleries manufacturing done on a job work basis.

As per the offer documents, the Company has started manufacturing Jewellery in house and reduces the dependence on getting jewellery manufactured on a job work basis. The in-house designing of the jewellery and in house manufacturing helps the company to have better management and coordination of man and material, better utilization of labour force, better inventory management and quality control on the final products. On account of its own manufacturing unit, The Company has complied with the stringent requirement norms of the known retail brand Jewellery showroom. The Client list of the Company includes leading reputed jewellery retailer which are multinational well-reputed and having a very good network. As of November 30, 2020, AGOL has 108 employees including management.

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its plans for the establishment of a jewellery manufacturing unit (Rs. 1.00 cr.), working capital (Rs. 21.25 cr.) and general corpus fund (Rs. 7.25 cr.), AGOL is coming out with an FPO of 3705600 equity shares of Rs. 10 each at a fixed price of Rs. 81 per share to mobilize Rs. 30.02 cr. The issue opens for subscription on March 03, 2021, and will close on March 08, 2021. Minimum application is to be made for 1600 shares and in multiples thereon, thereafter. Post allotment shares will be listed with BSE SME. The issue constitutes 16.53% of the post issue paid-up capital of the company. The company will be spending Rs. 0.52 cr. for this FPO process. Expenses on the Jewellery Manufacturing unit relates to spending on furniture and fixtures and contingency expenses. From the March 2019 IPO proceeds, it raised Rs. 1.50 cr. for the establishment of jewellery manufacturing unit out of which Rs. 0.41 cr. remained as an unutilized amount (page 18 of offer document).

Having raised initial equity at par, AGOL raised further equity in the price range of Rs. 20 to Rs. 660 per share between March 2010 and March 2019. It has also issued bonus shares in the ratio of 65 shares for 1 share held in January 2019. The average cost of acquisition of shares by the promoters is Rs. 3.30, Rs. 3.61 and Rs. 5.16 per share.

For this FPO, the company has assigned a mandate to Mehta Integrated Finance Ltd. Bigshare Services Pvt. Ltd. is the registrar to the issue. Beeline Broking Ltd. is the Market Maker for this issue.

Post issue, AGOL's current paid-up equity capital of Rs. 21.29 cr. will stand enhanced to Rs. 25.00 cr. At the offer price, the company is looking for a market cap of Rs. 202.49 cr.

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, AGOL has posted turnover/net profits of Rs. 46.93 cr. / Rs. 0.07 cr. (FY18), Rs. 88.20 cr. / Rs. 0.38 cr. (FY19), Rs. 120.66 cr. / Rs. 0.47 cr. (FY20). For the first half of the current fiscal ended on September 30, 2020, it has earned a net profit of Rs. 2.44 cr. on a turnover of Rs. 22.31 cr. This super performance is attributed to adjustment in inventories and hence raises concern.

For the last three fiscals, the company has posted an average EPS of Rs. 1.43 and an average RoNW of 0.99%. The issue is priced at a P/BV of 3.62 based on its NAV of Rs. 22.37 as of September 30, 2020, and at a P/BV of 2.69 based on its post-issue NAV of Rs. 30.06.

It appears that there have been inventory adjustments for the first half of the current fiscal; it would not be prudent to annualize it for the P/E ratio. Considering its average track record of the last three fiscal's average EPS, the issue is priced at a P/E of 56.64 on the current equity. Based on FY20 earnings the asking price is at a P/E of 426 (on post FPO equity basis) against the industry average of around 9.46.  Thus the issue is exorbitantly priced indicating the greed of promoters/merchant bankers.

COMPARISION WITH LISTED PEERS:
As per offer documents, AGOL has shown D P Abhushan and Moksh Ornaments as its listed peers that are currently trading at a P/Es of around 11.21 and 7.76 (as of March 02, 2021). However, they are not comparable on an apple to apple basis.

PERFORMANCE OF AGOL SINCE LISTING:
This company's shares have seen a high/low of Rs. 82/Rs. 15 since listing. Perhaps to pave the way for this greedily priced offer, some market operations are done to jack up the price to Rs. 82 in Calendar Year (CY) 2021 for which the high/low so fare is Rs. 82 /Rs. 43. For the previous two CYs, the high/lows are Rs. 58.5 / Rs. 15 (CY 2019) and Rs. 48.50 / Rs. 34.20 (CY 2020).

MERCHANT BANKER'S TRACK RECORD:
The merchant banker associated with this issue has handled 1 issue in fiscal 2016 and thereafter, this is the second mandate from its stable in the last six years. The only listing that took place at that time opened at a premium of 0.5% on the day of listing.

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