Kundan Edifice NSE SME IPO review (May apply)

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Review By Dilip Davda on September 7, 2023

•    KEL is engaged in the business of LED and EMS segments.
•    The company posted growth in its top and bottom lines for the reported periods.
•    The sudden boost in its top and bottom lines raises eyebrows and concern over sustainability.
•    Based on its IPO process spending, the issue is fully structured. 
•    Well-informed investors may park funds for the medium to long-term rewards.

ABOUT COMPANY:
Kundan Edifice Ltd. (KEL) entered into assembly and sale of lighting products in Fiscal 2014. After the current Promoter took over the control of the company in 2016, it focused its business operations on manufacturing, assembly and sale of light emitting diode ("LED") strip lights and since then, it emerged as one of the trusted electronics manufacturing services ("EMS") Companies for customers by providing end-to-end solutions in the area of operation. 

As an EMS Company, it has primarily an original design manufacturer ("ODM") and designs, develops, manufactures and supplies products to customers who then further distribute these products under their own brands. The company focuses on unconventional forms of lighting products i.e., LED strip lights that have varied applications across industries such as real estate, railways, automobiles, decorative lighting, etc. It provides lighting solutions to some of the key electrical and electronic manufacturing brands in India. The LED strip lights or flexible linear lights as a concept replacing traditional lighting like bulbs, tube lights and many other kinds of lights since the flexible linear lights have indoor as well as outdoor applications.

KEL has two manufacturing and assembly facilities in the state of Maharashtra with one located in Vasai and the other in Bhiwandi (collectively "manufacturing facilities"). As of August 31, 2023, it employed over 311 employees in the manufacturing facilities, including contract workers.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden IPO of 2772000 equity shares of Rs. 10 each at a fixed price of Rs. 91 per share to mobilize Rs. 25.23 cr. The issue opens for subscription on September 12, 2023, and will close on September 15, 2023. The minimum application to be made is for xxx shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 26.99% of the post-IPO paid-up equity capital of the company. KEL is spending Rs. 3.69 cr. for this IPO process, indicating a fully structured mode of the IPO. From the net proceeds, it will utilize Rs. 15.46 cr. for working capital, and Rs. 6.08 cr. for general corporate purposes. 

Fedex Securities Pvt. Ltd. is the sole lead manager and Cameo Corporate Services Ltd. is the registrar of the issue. Gretex Share Broking Pvt. Ltd. is the market maker for the company. 

The company has issued entire initial equity shares at par and has also issued bonus shares in the ratio of 1.5 for 1 in March 2023. The average cost of acquisition of shares by the promoters is Rs. 1.71, and Rs. 9.89 per share. 

Post-IPO, KEL's current paid-up equity capital of Rs. 7.50 cr. will stand enhanced to Rs. 10.27 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 93.48 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, KEL has posted a total income/net profit of Rs. 15.22 cr. / Rs. 0.77 cr. (FY21), Rs. 32.51 cr. / Rs. 1.68 cr. (FY22), land Rs. 60.46 cr. / Rs. 5.13 cr. (FY23). The sudden boost in its top and bottom lines for FY23 raises eyebrows and concerns over sustainability. 

For the last three fiscals, KEL has reported an average EPS of Rs. 4.34 and an average RoNW of 60.34%. The issue is priced at a P/BV of 8.42 based on its NAV of Rs. 10.81 as of March 31, 2023, and at a P/BV of 2.80 based on its post-IPO NAV of Rs. 32.45 per share. 

If we attribute FY23 super earnings to the post-IPO fully diluted paid-up capital of the company, then the asking price is at a P/E of 18.2. 

The company has posted PAT margins of 5.10 % for FY21, 5.17% for FY22, and 8.52% for FY23. Its RoCE margins for the same periods were 16.40%, 20.41% and 43.69% respectively. 

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 Artemis Electricals and Focus Lighting as their listed peers. They are currently trading at a P/E of 35.93, and 42.32 (as of September 07, 2023). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
This is the 18th mandate from Fedex Securities in the last four fiscals (including the ongoing one). Out of the last 10 listings, 2 opened at discount, 1 at par and the rest with premiums ranging from 0.21% to 108.93% on the date of listing. 

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