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Le Merite NSE SME IPO review (May apply)

Review By Dilip Davda on Apr 18, 2022

•    LMEL is engaged in the manufacturing and trading of textile products.
•    It has posted surprising financial data despite trading activities. 
•    It runs its business on an asset-light model with leased production facilities.
•    The issue is fully priced based on its super earnings ratio.
•    Cash surplus risk seekers may consider parking funds for the medium to long term.

PREFACE:
The company originally filed its offer documents for the issue of 7400000 equity shares to mobilize Rs. 80 cr. for its funding needs. However, it has now entered with a lower amount of Rs. 48 cr. and has also reduced the number of shares by 1000000. According to management, it has taken a hit on its issue size at a reduced valuation and left something on the table for the new investors. But its rising margins on trading activities raises concern over sustainability going forward as it does largely trading activities with an asset-light model of business. 

ABOUT COMPANY:
Le Merite Exports Ltd. (LMEL) is an ISO 9001:2015 certified company engaged in manufacturing and trading of textile products namely cotton yarn, greige fabric and finished fabric for domestic and export sales. It deals in a diversified product portfolio with the capability to supply compact cotton yarn varying from counts NE 16/1 to NE 32/1 & NE 16/2 to NE 32/2 combed carded & double yarn that is used in various forms and for varied end uses. LMEL also exports sustainable - eco-friendly organic yarn and fabric to international textile and garment manufacturers. The company has been recognized as a "Three Star Export House" by the Director-General of Foreign Trade with a certificate valid from September 30, 2015, to September 29, 2020. Further, it made an application on September 29, 2021, for the renewal of the certificate. 

Exports accounted for 86.53% and 76.08%, 83.52% and 91.86% of revenue from the sale of products for the nine months period ended on December 31, 2021, and for the Financial years March 31 of 2021, 2020 and 2019 respectively. For the Financial year March 31, 2021, the Company exported its products to 39 countries with more than 70 % of the revenue from export sales coming from China, Bangladesh, Turkey and Iran. The export sales on this scale are possible due to LMEL's relationship with customers across the world and the network of sales representatives/agents in various countries. For the period from the financial year 2017 to the nine months period ended on December 31, 2021, it has served global customers in 40 countries including India. 

LMEL has adopted the capital asset-light model by taking operational control over cotton yarn spinning mills through long term leases, operational and management arrangements and sole selling agents. As of December 31, 2021, it had 221 full-time employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its needs for incremental working capital (Rs. 34.00 cr.) and general corporate purposes (Rs. 11.00 cr.), LMEL is coming out with a maiden IPO of 6400000 equity shares of Rs. 10 each at a fixed price of Rs. 75 per share to mobilize Rs. 48.00 cr. The issue opens for subscription on April 25, 2022, and will close on April 28, 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 27.26% of the post issue paid-up capital of the company. LMEL is spending Rs. 3.00 cr. for this IPO process. 

The issue is solely lead managed by Fedex Securities Pvt. Ltd. and Bigshare Services Pvt. Ltd. is the registrar to the issue. Rikhav Securities Ltd. is the market maker for this company. 

After having issued its entire equity capital at par so far, it has also issued bonus shares in the ratio of 9 for 1 in January 2022. The average cost of acquisition of shares by the promoters is Re. 1 per share.  

Post-IPO, LMEL's current paid-up equity capital of Rs. 17.08 cr. will stand enhanced to Rs. 23.48 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 176.11 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, LMEL has posted turnover/net profits of Rs. 180.93 cr. / Rs. 1.13 cr. (FY19), Rs. 217.28 cr. / Rs. 3.15 cr. (FY20) and Rs. 269.13 cr. / Rs. 7.06 cr. (FY21). For the first 9M of FY22 ended on December 31, 2021, it has earned a net profit of Rs. 15.87 cr. on a turnover of Rs. 370.87 cr. Thus while its top line grew by over 100% in the reported period, its bottom line marked growth of over 14 times, which raises eyebrows, since the company is majorly in trading with third party operations and has an asset-light model of business.  

For the last three fiscals, LMEL has posted an average EPS of Rs. 2.79 and an average RoNW of 39.46%. The issue is priced at a P/BV of 3.19 based on its NAV of Rs. 23.54 and at a P/BV of 2.00 based on its post-IPO NAV of Rs. 37.57 per share. If we annualize FY22 super earnings and attribute it to the fully diluted post IPO equity capital, then the asking price is at a P/E of 11.09. 

However, based on its FY21 earnings its P/E stands at 24.91. Thus the issue appears fully priced with its supper earnings. The sustainability of such margins going forward raises major concerns. 

COMPARISON WITH LISTED PEERS:
As per the offer document, LMEL has shown Ambika Cotton, Pashupati Cotspin, Shiva Texyarn, Sambandam Spinning, Precot and KPR Mills as its listed peers. They are currently trading at a P/E of 8.45, 32.56, 13.81, 3.88, 3.55 and 32.87 (as of April 18, 2022). However, they are not truly comparable on an apple-to-apple basis. 

DIVIDEND POLICY:
The company has not declared 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 RECORDS:
This is the 13th mandate from Fedex Securities in the last four fiscals (including the ongoing one). Out of the last 10 listings, 2 opened at par and the rest with premiums ranging from 0.8% to 1.93% on the day of listings. Thus it has an average track record.


Conclusion / Investment Strategy

The company is largely doing trading in textile products with third-party contracts. Its major earnings are from exports. Rising margin earnings shown by it over the last three fiscals are surprising and raise eyebrows. In the context of its recent super earnings, its valuations are at the optimum level. The sustainability of such a margin going forward is a major concern. Dependency on third party contracts poses major risks. Government policy on trade with China, and recent clashes with Turkey pose threats for its export earnings. Cash surplus risk seekers may consider parking funds for the medium to long term.

Review By Dilip Davda on Apr 18, 2022

Review Author

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 before making any actual investment decisions, based on information published here. With entry barriers, SEBI wants only well-informed investors to participate in such offers. With crazy listings in the past, SME IPOs drew the attention of investors across the board. However, as SME issues have entry barriers and continued low preference from the broking community, any reader taking decisions based on any information published here does so entirely at own risk. The above information is based on information available as on date coupled with market perceptions. The Author has no plans to invest in this offer.

(SEBI registered Research Analyst-Mumbai).


About Dilip Davda

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.

Email: dilip_davda@rediffmail.com

Le Merite Exports IPO FAQs

  1. 1. Why Le Merite Exports IPO?

    The initial public offer (IPO) of Le Merite Exports Limited offers an early investment opportunity in Le Merite Exports Limited. A stock market investor can buy Le Merite Exports IPO shares by applying in IPO before Le Merite Exports Limited shares get listed at the stock exchanges. An investor could invest in Le Merite Exports IPO for short term listing gain or a long term.

  2. 2. How is Le Merite Exports IPO?

    Read the Le Merite Exports IPO recommendations by the leading analyst and leading stock brokers.

  3. 3. Le Merite Exports IPO what should investors do?

    Le Merite Exports IPO offers an opportunity to buy IPO shares before they get listed at the stock exchanges. Read the Le Merite Exports IPO Notes, Analysis and Recommendations by leading stock brokerage firms and experts in the above answer.

  4. 4. Is Le Merite Exports IPO good?

    Our recommendation for Le Merite Exports IPO is to subscribe for long term.

  5. 5. Is Le Merite Exports IPO worth Investing?

    As per the analysis by our lead analyst Mr. Dilip Davda, we suggest you to subscribe for long term to the Le Merite Exports IPO.

  6. 6. When will Le Merite Exports IPO allotment status?

    The Le Merite Exports IPO allotment status will be available on or around [.]. The allotted shares will be credited in demat account by [.]. Visit Le Merite Exports IPO allotment status to check.

  7. 7. When will Le Merite Exports IPO list?

    The Le Merite Exports IPO will list on Monday, May 9, 2022, at NSE SME.

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