Ishan International NSE SME IPO review (Avoid)

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Review By Dilip Davda on September 5, 2022

•    IIL is engaged in the selling of heavy engineering equipment in international markets. 
•    Its top line has been static for the last three fiscals. 
•    After the dismal performance for FY20 and FY21, it reported fantastic profits for FY22.
•    The sustainability of such performance going forward is a major concern.
•    Based on its FY22 super earnings, the issue is exorbitantly priced.
•    There is no harm in skipping this pricy bet 

ABOUT COMPANY:
Ishan International Ltd. l(IIL) is an ISO 9001: 2015 certified Company, GoI certified Star Export House and, a diversified heavy engineering company with a history of 26+ years of experience in selling heavy engineering equipment in international markets. It is engaged in contracting and building projects that focus on supplying machines, erection/installation, commissioning and operational training for sugar plants, jaggery plants, pharmaceutical plants, hydropower plants and pollution control systems. The company also provides high-end engineering services and solutions for all types of activities in Hydro Power, Sugar and Jaggery, Pharmaceuticals, and Pollution Control Systems. IIL provides customized heavy equipment.

Established in 1995, its initial business was pharmaceutical machinery and raw materials for pharmaceutical ingredients, and our company later diversified into heavy engineering. IIL's business is largely focused on international markets. In 1999, it established 1st overseas office in Vietnam. Between 1999 and 2021, the company set up overseas offices in the Philippines, Indonesia, Hanoi (Vietnam), Ho Chi Minh City (Vietnam), and Kenya (in the process). Its core strength - Quality Management System - is in place under ISO 9001: 2015.

Since 2004, IIL has leveraged its track record internationally by providing a wide range of heavy engineering machinery on various overseas projects, particularly in the Philippines, Vietnam, and Indonesia to esteemed clients like Busco Sugar Milling Co. Inc, Univarsal RRobina Corporation C Group, First Farmer Holding Corporation FFHC, Sonedco, Sunwest, Navetco-National Veterinary Joint Stock Company, Minh Dan Pharmaceutical Joint Stock Company, Thien Tan, Song Da Group, NCC, Kosy Group, Tra Linh, PBT PT. Purnama Bohler Technologi, GMMPT. Gendhis Multi Manis, PSMI, GMTPT. Garuda Mas Transindo, Biscom Inc, Lopez Sugar Corporation, Dynamic Technologist & Trading, Papiz Sugar, Central Inc, PT. PG Gorontalo, Bogo-Medellin milling Company Inc, Kibos Sugar and Allied Industries Limited etc. As of March 31, 2022, it had 16 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its need for funding of JV and/or acquisition (Rs. 3.50 cr.), working capital (Rs. 10.00 cr.), and general corporate purposes (Rs. 2.80 cr.), IIL is coming out with a maiden IPO of 2280000 equity shares of Rs. 10 each at a fixed price of Rs. 80 per share to mobilize Rs. 18.24 cr. The issue opens for subscription on September 09, 2022, and will close on September 14, 2022. Minimum application is to be made for 1600 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 31.63% of the post-IPO paid-up capital of the company. IIL is spending Rs. 1.94 cr. for this IPO process. This indicates nature of this IPO is fully structured with funding arrangements. 

The issue is solely lead managed by First Overseas Capital Ltd. and KFin Technologies Ltd. is the registrar to the issue. NNM Securities Pvt. Ltd. is the market maker for this company. 

Having issued initial equity shares at par, it issued further shares in the price range of Rs. 28.29 and Rs. 80 between August 2017 and March 2022. It has also issued bonus shares in the ratio of 1 for 1 in March 2003, 1 for 2 in December 2009, 1 for 4 in September 12, and 3 for 8 in April 2021. The average cost of acquisition of shares by the promoters is Rs. 2.21 per share. 

Post-IPO, IIL's current paid-up equity capital of Rs. 4.93 cr. will stand enhanced to Rs. 7.21 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 57.66 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, IIL has posted turnover/net profits of Rs. 22.73 cr. / Rs. 0.28 cr. (FY20), Rs. 22.71 cr. / Rs. 0.15 cr. (FY21) and Rs. 21.74 cr. / Rs. 1.52 cr. Thus while its top line remained almost static, it marked boosted profits for FY22 that raises eyebrows and appears fishy. Such marvellous performance in the pre-IPO year is a common scene for SME IPOs. 

For the last three fiscals, IIL has reported an average EPS of Rs. 2.02 and an average RoNW of 12.50%. The issue is priced at a P/BV of 6.36 based on its NAV of Rs. 12.58 as of March 31, 2022, and at a P/BV of 2.36 based on its post-IPO NAV of Rs. 33.90 per share. 

If we attribute its super earnings of FY22 on post IPO fully diluted equity capital, then the asking price is at a P/E of around 38.09.  Thus even with its super earnings of FY22, the issue is exorbitantly priced. The sustainability of such margins going forward is a major concern. 

COMPARISON WITH LISTED PEERS:
As per the offer documents, IIL has shown Lokesh Machines, Ador Fontech, Anup Engg, and ISGEC Heavy as its listed peers. They are currently trading at a P/E of 36.18, 12.65, 14.58, and 27.24 (as of September 05, 2022). However, they are not truly comparable on an apple-to-apple basis. 

DIVIDEND POLICY:
The company has not paid any dividend since incorporation. It will adopt a prudent dividend policy post listing, based on its financial performance and future prospects. 

MERCHANT BANKER'S TRACK RECORD:
This is the 10th mandate from First Overseas in the last four fiscals (including the ongoing one). Out of the last 9 listings, 1 opened at discount, 3 opened at par and the rest with premiums ranging from 1.40% to 120% on the day of listing.

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