Refractory Shapes NSE SME IPO review (May apply)

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Review By Dilip Davda on May 4, 2024

•    The company is engaged in refractory segment which is highly competitive and fragmented one.
•    It marked inconsistency in its bottom lines for the reported periods. 
•    Based on FY24 annualized super earnings, the issue appears fully priced. 
•    Well-informed investors may park moderate funds for the medium to long term rewards.

ABOUT COMPANY:
Refractory Shapes Ltd. (RSL) is primarily engaged in the manufacturing of different types of Bricks, "PCPF"), Burner Blocks, Special shaped Refractory bricks, Dense & Insulating Castables & Mortars. The tailored made products shaped by the Company finds its application in a diverse range of Industries, including Steel, Refineries, Fertilizers, Petrochemicals, Glass, Cement etc. 

The company's refractories are engineered to endure the harsh conditions of these industries, contributing to enhanced operational efficiency and extended equipment life, the tailored made finished goods provide diversity in the products being manufactured by the Company wherein modern manufacturing equipment are installed for scaling the manufacturing. In addition to the manufacturing activity being carried out by the Company, Refractory Shapes is often involved in receiving orders for those items from clients which are not a part of Company's operations in manufacturing activities. These items include Metallic Anchors which are used as support for installing refractory Castables for which Raw Materials such as tabular alumina, low alumina bricks and insulation bricks, etc. are required, for such orders, RSL procures these items from their approved vendors and sells to the clients, hence, the Company is also involved in trading of the aforesaid products.

The Company deals in Precast shapes, then, there are refractory ceramic fibers, which resemble residential insulation, but insulate at much higher temperatures. Bricks and shapes are the more traditional form of refractories and historically have accounted for the majority of refractory production. As of December 31, 2023, it had 38 employees on its payroll.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden book building route IPO of 6000000 equity shares of Rs. 10 each to mobilize Rs. 18.60 cr. at the upper cap. It has announced a price band of Rs. 27 - Rs. 31 per share. The issue opens for subscription on May 06, 2024, and will close on May 09, 2024. The minimum application to be made is for 4000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 27.52% of the post-IPO paid-up capital of the company. From the net proceeds of the IPO, it will utilize Rs. 4.30 cr. for expansion of existing unit, Rs. 2.51 cr. for purchase of new plant and machinery, Rs. 7.00 cr. for repayment/prepayment of certain borrowings, Rs. 0.11 cr. for purchase of commercial vehicle, and the rest for general corporate purposes. 

The issue is solely lead managed by Shreni Shares Ltd., and Bigshare Services Pvt. Ltd. is the registrar of the issue. Shreni Shares Ltd. is also the market maker for the company. 

The company has issued/converted entire equity capital at par so far and has also issued bonus shares in the ratio of 157 for 1 in December 2023. The average cost of acquisition of shares by the promoters is Rs. NIL, Rs. Negligible, Rs. 0.19, and Rs. 10 per share. 

Post-IPO, company's current paid-up equity capital of Rs. 15.80 cr. will stand enhanced to Rs. 21.80 cr. Based on the upper IPO price band, the company is looking for a market cap of Rs. 67.58 cr.  

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has posted a total income/net profit of Rs. 21.80 cr. / Rs. 1.56 cr. (FY21), Rs. 26.22 cr. / Rs. 2.87 cr. (FY22), and Rs. 38.72 cr. / Rs. 1.92 cr. (FY23). For 9M of FY24 ended on December 31, 2023, it earned a net profit of Rs. 3.08 cr. on a total income of Rs. 29.99 cr. Thus though its top line continued to surge, it posted inconsistency in its bottom lines. 

For the last three fiscals, it has reported an average EPS of Rs. 1.38, and an average RoNW of 14.42%. The issue is priced at a P/BV of 4.95 based on its NAV of Rs. 6.26 as of December 31, 2023, and at a P/BV of 1.87 based on its post-IPO NAV of Rs. 16.58 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 16.49. Thus based on its FY24 super earnings, the issue appears fully priced. 

For the reported periods, the company has posted PAT margins of 7.49% (FY21), 11.26% (FY22), 5.05% (FY23), 10.47% (9M-FY24), and RoCE margins of 9.54%, 11.38%, 8.04%, 9.79% respectively for the referred periods. 

DIVIDEND POLICY:
The company has not declared any dividends for the reported periods of the offer document. 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 S P Refractories and IFGL Refractories as their listed peers. They are trading at a P/E of 30.4 and 20.8 (as of May 03, 2024). However, they are not comparable on an apple-to-apple basis.

MERCHANT BANKER'S TRACK RECORD:
This is the 25th mandate from Shreni Shares in the last three fiscals (including the ongoing one), out of the last 10 listings, all listed with premiums ranging from 7.5% to 143.24% on the date of listing.

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