Emmforce Auto BSE SME IPO review (Apply)

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Review By Dilip Davda on April 19, 2024

•    The company is engaged in the business of manufacturing niche automotive drivetrain parts.
•    It posted growth in its top and bottom lines for FY21 and FY22.
•    The company marked degrowth in top and bottom lines for FY23.
•    From 7M-FY24 performance it appears to be back on track. 
•    Based on FY24 annualized earnings, the issue appears fully priced.
•    Well-informed investors may park funds for the medium to long term rewards.

ABOUT COMPANY:
Emmforce Autotech Ltd. (EAL) is engaged in the business of manufacturing niche automotive drivetrain parts like Differential Housings, Differential Lockers, Differential Covers, 4WD Locking Hubs, Spindles, Axles & Shafts, Gear Shifters, Yokes, Differential Spools, Differential Tools and various differential forged / cast parts primarily for 4-wheel Drive and performance racing vehicles. The company has been engaged in exports ever since its inception. It has established itself as a manufacturer of Drivetrain Parts in India and is one stop shop for quality cost competitive drivetrain parts and providing out-of-the-box solutions to its customers through designing and development of complex / special parts.

Huge inventory of tooling for forging and machining, jigs and fixtures for machining, extra focus on engineering gives Emmforce an edge over the competition to develop new parts in a much faster time than competition. The company helps to accelerate performance and improving profitability through faster product development, shorter lead time, on time delivery, comprehensive product range and competitive pricing.

EAL offers fully integrated engineering solutions from conceptualization, development and validation to implementation and manufacturing of products. The conceptualization stage involves acquiring market intelligence, assessing customer requirement and formulating customized strategy for individual customers. The development phase includes product designing, material procurement and processing. This is followed by the validation phase, which involves prototyping, testing and feasibility analysis. Its in-house manufacturing and implementation competencies include forging, machining, fabrications, heat treatment, surface finish, logistics, quality and testing, design and validation. As of October 31, 2023, it had 128 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden book building route IPO of 5499600 equity shares of Rs. 10 each to mobilize Rs. 53.90 cr. at the upper cap. It has announced a price band of Rs. 93 - Rs. 98 per share. The issue opens for subscription on April 23, 2024, and will close on Aril 25, 2024. The minimum application to be made is for 1200 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. The issue constitutes 26.83% of the post-IPO paid-up capital of the company. From the net proceeds of the IPO, it will utilize Rs. 10.00 cr. for investment in subsidiary - Emmforce Mobility Solutions Pvt. Ltd., Rs. 27.00 cr. for working capital, and the rest for general corporate purposes.

The issue is solely lead managed by Beeline Capital Advisors Pvt. Ltd., and Link Intime India Pvt. Ltd. is the registrar of the issue. Beeline group's Spread X Securities Pvt. Ltd. is the market maker for the company. The offer document is silent on underwriting info.

The company has issued/converted entire equity capital at par value so far. The average cost of acquisition of shares by the promoters is Rs. 10.00 per share. 

Post-IPO, company's current paid-up equity capital of Rs. 15.00 cr. will stand enhanced to Rs. 20.50 cr. Based on the upper IPO price band, the company is looking for a market cap of Rs. 200.90 cr.  

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has posted a total income/net profit of Rs. 51.85 cr. / Rs. 5.09 cr. (FY21), Rs. 71.38 cr. / Rs. 7.33 cr. (FY22), and Rs. 48.75 cr. / Rs. 4.39 cr. (FY23). Clubbing the two broken periods performance for 7M of FY24 ended on October 31, 2023, it earned a net profit of Rs. 5.12 cr. on a total income of Rs. 47.90 cr. The company has posted degrowth in its top and bottom lines for FY23. It appears to be back on track with its FY24 - first seven months' performance for FY24.

According to the management, the company derives over 98% revenue from exports. Due to higher demand and bulk inventory purchases by global clients, it marked growth in top and bottom lines for FY21 and FY22, however, due to piled up inventory, FY23 marked minor setback. The situation has turned for the current year as indicated by its performance for 7M-FY24, and management is confident of maintaining the trends in coming years with backward integration and high margin products. It enjoys niche place in 4WD locking hub equipments which contributes over 45% in total turnover. 

For the last three fiscals, it has reported an average EPS of Rs. 3.66, and an average RONW of 26.39%. The issue is priced at a P/BV of 9.52 based on its NAV of Rs. 10.29 as of October 31, 2023, and at a P/BV of 2.90 based on its post-IPO NAV of Rs. 33.82 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 22.90. Thus this IPO appears fully priced based on its recent financial performance. 

For the reported periods, the company has posted PAT margins of 10.09% (FY21), 10.61% (FY22), 9.60% (FY23), 8.42% (7M-FY24), but the offer document is missing RoCE data in the KPI table. 

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 Divgi Torq as their listed peer. It is trading at a P/E of 55.9 (as of April 19, 2024). However, they are not comparable on an apple-to-apple basis.

MERCHANT BANKER'S TRACK RECORD:
While overall last three fiscals mandate track record is missing in the offer document (the LM is asking to refer their website for this data), but as per Chittorgarh.com web, this is the 36th mandate from Beeline Capital Advisors Pvt. Ltd. in the last three fiscals (including the ongoing one) and out of last 10 listings, all listed with premiums ranging from 5.88% to 200% on the date of listing. 

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