Review By Dilip Davda on Dec 21, 2018
• ACL primarily deals in cotton bales and seeds. Capacity utilization is very low.
• Sudden spurt in earnings for last 15 months raises concern.
• Issue pricing is very aggressive if compared on the basis of financial data.
• Currently textile segment is not fancied by investors.
Axita Cotton Ltd. (ACL) is producing cotton bales and cotton seeds. The company is producing mainly two varieties of cotton bales namely Shankar-6 and MCU-5/MECH. The production facility is situated at Kadi in Mahesana District of Gujarat state which is close to the rich cotton growing areas of Maharashtra, Saurashtra and other regions of Gujarat. Its products are sold majorly in the state of Gujarat, Rajasthan, Maharashtra and Madhya Pradesh. ACL is also engaged in the business of trading of Kapas, cotton bales and cotton seeds. It is also doing ginning and pressing of Kapas on job work basis.
ISSUE DETAILS/CAPITAL HISTORY:
To part finance working capital and general corpus fund needs, ACL is coming out with a maiden IPO of 1752000 equity shares of Rs. 10 each at a fixed of Rs. 60 per share to mobilize Rs. 10.51 cr. The issue opens for subscription on 27.12.18 and will close on 02.01.19. Minimum application is to be made for 2000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. Issue constitutes 26.74% of the post issue paid up capital of the company.
The issue is solely lead managed by Beeline Broking Ltd. while Link Intime India Pvt. Ltd. is the registrar to the issue. Having raised initial equity at par, it raised further equity at a price of Rs. 15 per share in September 2018. Average cost of acquisition of shares by the promoters is Rs. 6.94, Rs. 11.94 and Rs. 12.62 per share. Post issue, ACL's current paid up equity capital of Rs.4.80 cr. will stand enhanced to Rs. 6.55 cr.
On the performance front, for the last four fiscals, ACL has posted turnover/net profits of Rs. 77.05 cr. / Rs. (-0.29) cr. (FY15), Rs. 68.76 cr. / Rs. 0.12 cr. (FY16), Rs. 91.52 cr. / Rs. 0.03 cr. (FY17) and Rs. 123.92 cr. / Rs. 0.82 cr. (FY18). Sudden jump in FY top and bottom lines are bit surprising. For Q1 of FY19 it has earned net profit of Rs. 0.33 cr. on a turnover of Rs. 21.22 cr. Thus higher profit for Q1 is also raising concern. Company's current debt/equity ratio is very high at 4.75. Capacity utilization is very poor. According to offer documents, boost in revenues are due to transactions with group companies.
For last three fiscals, it has posted an average EPS of Rs. 1.76 and an average RoNW of 14.27%. Issue is priced at a P/BV of 4.28 on the basis of its NAV of Rs. 14.01 as on 30.06.18 and at a P/BV of 2.25 on the basis of post issue NAV of Rs. 26.65.
If we annualize latest earnings and attribute it on fully diluted equity post issue, then asking price is at a P/E of around 30 making it a costly bet.
COMPARE WITH LISTED PEER:
As per offer document, it is considering Pashupati Cotspin and Santaram Spin as its listed peers that are currently trading at a P/Es of around NA and 28 (as on 21.12.2018). However, peers are not strictly comparable on the basis of business model.
MERCHANT BANKER'S TRACK RECORD.
On merchant banker's front, this is the 3rd mandate from its stable in last three fiscals. Last two listings opened at a premium ranging from 4.5% to 10% on the day of listings.
Financial performance is average, issue pricing is very aggressive. Currently textile segment is not fancied by investors. Considering all these, there is no harm in giving this issue a miss.
Review By Dilip Davda on Dec 21, 2018
DISCLAIMER: No financial information whatsoever published anywhere here should be construed as an offer to buy or sell securities, or as advice to do so in any way whatsoever. All matter published here is purely for educational and information purposes only and under no circumstances should be used for making investment decisions. Readers must consult a qualified financial advisor prior to making any actual investment decisions, based on information published here. With entry barriers, SEBI wants only well informed investors to participate is such offers. With crazy recent listings, SME IPOs have started drawing attention of investors across the board. However, as SME issues have entry barriers and continued low preference from broking community, any reader taking decisions based on any information published here does so entirely at own risk. Investors should bear in mind that any investment in stock markets are subject to unpredictable market related risks. Above information is based on information available as on date coupled with market perceptions. Author has no plans to invest in this offer.
(SEBI registered Research Analyst-Mumbai).
About Dilip Davda
Dilip Davda is veteran journalist associated with stock market since 1978. He is contributing to print and electronic media on stock markets/insurance/finance since 1985.
Dilip Davda is a leading reviewer of public issues and NCDs in the primary stock market in India. The knowledge he gained over 3 decades while working in the stock market and a strong relationship with popular lead managers makes his reviews unique. His detail fundamental and financial analysis of companies coming up with IPO helps investors in the primary stock market. Dilip Davda has a special interest in analyzing the SME companies and writing reviews about their public issues. His reviews are regularly published online and in news papers.
The Axita Cotton IPO Analysis helps you to understand about the company, offer detail, valuation, capital structure and financial performance. Our SEBI registered IPO Analysts tells you if Axita Cotton IPO worth investing. The Axita Cotton IPO Note sets the IPO expectations in systematic way which tells you if Axita Cotton IPO good to buy (good or bad / yes or no). The IPO Forecast tells you weather to invest in Axita Cotton IPO by providing IPO recommendations i.e. subscribe, avoid and neutral.
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