Comrade Appliances BSE SME IPO review (Avoid)

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Review By Dilip Davda on May 26, 2023

•    CAL is in the business of manufacturing and marketing air coolers/electric geysers. 
•    It has posted an average performance so far. 
•    The sudden boost in bottom lines for FY23 appears to be the window dressing.
•    Based on FY23 boosted earnings the issue is priced aggressively. 
•    There is no harm in skipping this pricey bet. 

ABOUT COMPANY:
Comrade Appliances Ltd. (CAL) is engaged in the process of manufacturing an extensive array of Air Coolers and Electric Geysers. It manufactures consumer durable goods and assembles a wide array of products and provides end-to-end product solutions. CAL serves under both original equipment manufacturer ("OEM") and original design manufacturer ("ODM") business models. Under the OEM model, it manufactures and supplies products basis designs developed by customers, who then further distribute these products under their own brands. Under the ODM model, in addition to manufacturing, it conceptualizes and designs the products which are then marketed to customers' prospective customers under their brands. CAL's current product portfolio of consumer goods includes (I) Air Coolers; (ii) Electric Geysers. 

The company offers innovative solutions to customers, which include leading international and national consumer brands. CAL's comprehensive solution suite includes global sourcing, fabrication of components and parts, captive manufacturing and assembly, quality testing, packaging and logistics support, which enables it to partner with leading consumer goods brands in India. Its key customers include leading brands in consumer durables. 

The company has a brand name, Comrade. It manufactures and sells products under the brand name of "Comrade". As of the date of this Red Herring Prospectus, the company has three registered designs for products and two trademarks. As of January 31, 2023, it had 52 employees on its payroll.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden IPO of 2278000 equity shares of Rs. 10 each via a book-building process. It has announced a price band of Rs. 52 - Rs. 54 per share and mulls mobilizing Rs. 12.30 cr. at the upper cap. The issue opens for subscription on May 31, 2023, and will close on June 05, 2023. 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 30.26% of the post-IPO paid-up capital of the company. Excluding the reserve portion for the market maker for 114000 shares, the company has allocated 1080000 shares for QIBs (including Anchor portion of 648000 shares), 326000 shares for HNIs and 758000 shares for Retail investors. 

The company is spending Rs. 2.79 cr. for this IPO process. From the net proceeds, it will utilize Rs. 7.20 cr. for the working capital and the rest for general corporate purposes. Higher spending indicates fully structured funding arrangements for the issue. 

Gretex Corporate Services Ltd. is the sole lead manager and Bigshare Services Pvt. Ltd. is the registrar of the issue. Gretex Group's Gretex Share Broking Pvt. Ltd. is the market maker for the company. 

Having issued initial equity at par value, the company converted further equity shares in the price range of Rs. 12 - Rs. 30 between December 2021 and January 2023. The average cost of acquisition of shares by the promoters is Rs. 10.00 and Rs. 12.00 per share. 

Post-IPO, CAL's current paid-up equity capital of Rs. 5.25 cr. (5250795 shares) will stand enhanced to Rs. 7.53 cr. (7528795 shares). At the upper cap of the IPO pricing, the company is looking for a market cap of Rs. 40.66 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, CAL has posted a turnover/net profit of Rs. 26.04 cr. / Rs. 0.20 cr. (FY21), Rs. 29.73 cr. / Rs. 0.39 cr. (FY22), and Rs. 26.99 cr. / Rs. 1.64 cr. (FY23). Though it suffered a setback in the top line for FY23, a sudden boost in the bottom line on lower turnover raise eyebrows and hints at some window dressing to pave the way for fancy pricing of the IPO. 

For the last three fiscals, CAL has reported an average EPS of Rs. 2.01 and an average RoNW of 15.83%. The issue is priced at a P/BV of 4.07 based on its NAV of Rs. 13.28 as of March 31, 2023, and at a P/BV of 2.48 based on its post-IPO NAV of Rs. 21.79 per share (at the upper cap). 

If we attribute FY23 earnings to post-IPO paid-up equity capital, the asking price is at a P/E of 24.88. Thus the issue is priced aggressively. Its peers' comparison appears to be the eyewash only. 

DIVIDEND POLICY:
The company has not declared any dividends for the reported periods of the offer document. It will adopt a prudent dividend policy post-listing, based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per the offer document, the company has shown Dixon Tech (a great surprise) and PG Electroplast as their listed peers. They are currently trading at a P/E of 103.25, and 80.16 (as of May 26, 2023). However, they are not truly comparable on an apple-to-apple basis. It could have considered Symphony as its listed peer that is currently trading at a P/E of around 35.92. 

MERCHANT BANKER'S TRACK RECORD:
This is the 15th mandate from Gretex Corp in the last three fiscals (including the ongoing one). Out of the last 10 listings, 2 opened at discount, 1 at par and the rest listed at premiums ranging from 1.31% to 90% on the listing date. 

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