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Sah Polymers IPO review (Avoid)

Review By Dilip Davda on Dec 26, 2022

  • SPL is operating in the highly competitive field of Packaging materials.
  • Sudden spurt in bottom lines post consolidation raises eyebrows.
  • There are many concerns over the future prospects of the company.
  • The issue is highly priced discounting all near-term positives. 
  • There is no harm in skipping this pricy bet. 

ABOUT COMPANY:
Sah Polymers Ltd. (SPL) is promoted by SAT Industries Ltd. - a BSE/NSE listed company. SPL is an ISO 9001:2015 certified company, primarily engaged in the manufacturing and selling of Polypropylene (PP)/High-Density Polyethylene (HDPE) FIBC Bags, Woven Sacks, HDPE/PP woven fabrics, based products of different weights, sizes, and colours as per customers' specifications. 

It offers customized bulk packaging solutions to business-to-business ("B2B") manufacturers catering to different industries such as Agro Pesticides Industry, Basic Drug Industry, Cement Industry, Chemical Industry, Fertilizer Industry, Food Products Industry, Textile Industry, Ceramic Industry, and Steel Industries. Besides, the company is a Del Credere Associate cum Consignment Stockist (DCA/ CS) of Indian Oil Corporation Limited and also operates as a Dealer Operated Polymer Warehouse (DOPW) of Indian Oil Corporation Limited for their polymer division. It has entered into arrangements as a third-party manufacturer to manufacture tape and fabric based on customers' requirements. As of October 31, 2022, it has 94 employees on its payroll. 

Furthermore, SPL gained a competitive advantage due to its recent acquisition of Fibcorp Polyweave Private Limited on January 5, 2022, which will leverage to generate incremental synergies. The company intends to apply a selective and disciplined acquisition strategy that focuses on enhancing scale, product diversity, and geographic reach while bolstering its financial performance through synergies and additional cash generation.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden book-building route IPO of 10200000 equity shares of Rs. 10 each with a price band of Rs. 61 - Rs. 65 per share. SPL mulls mobilizing Rs. Rs. 66.30 cr. at the upper cap. The issue opens for subscription on December 30, 2022, and will close on January 04, 2023. The minimum application is to be made for 230 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 39.54% of the post-issue paid-up capital of the company.

From the net proceeds of the fresh issue, SPL will utilize (Rs. 8.17 cr.) for setting up of new FIBC production unit, (Rs. 19.66 cr.) for repayment of certain unsecured borrowings, (Rs. 14.96 cr.) for working capital, and the balance for general corporate purposes. 

As SPL has recorded an average operating profit below Rs. 15 cr. during the preceding three fiscals, as per SEBI ICDR Regulations 6 (2), it has allocated 75% for QIBs, 15% for HNIs, and 10% for Retail investors. 

The sole Book Running Lead Manager (BRLM) for this issue is Pantomath Capital Advisors Pvt. Ltd., and Link Intime India Pvt. Ltd. is the registrar of the issue.

Having issued initial equity shares at par, the company raised further equity shares at Rs. 30 per share in March 2018. It also did a gimmick of split and consolidation of shares between October 2009 and October 2011. It has also issued bonus shares in the ratio of 1 for 1 in March 2013. The average cost of the acquisition of shares by the promoters is Rs. 12.96 per share. 

Post-IPO, SPL's current paid-up equity capital of Rs. 15.60 cr. will stand enhanced to Rs. 25.80 cr. Based on the upper cap of the IPO price, the company is looking for a market cap of Rs. 167.67 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, SPL has (on a standalone basis) posted a turnover/net profit of Rs. 49.91 cr. / Rs. 0.30 cr. (FY20), Rs. 55.34 cr. / Rs. 1.27 cr. (FY21), and (on a consolidated basis) Rs. 81.23 cr. / Rs. 4.38 cr. (FY22). For Q1 of FY23, it (on a consolidated basis) earned a net profit of Rs. 1.25 cr. on a turnover of Rs. 27.59 cr. Thus sudden boost in bottom lines post-consolidation raises eyebrows. 

For the last three fiscals, the company has reported an average EPS of Rs. 1.71 and an average RoNW of 10.58%. The issue is priced at a P/BV of Rs. 3.65 based on its NAV of Rs. 17.79 as of June 30, 2022, and at a P/BV of 1.78 based on its post-IPO NAV of Rs. 36.46 per share (at the upper cap). 

If we annualize FY23 earnings and attribute it to fully diluted post-IPO paid-up equity capital, then the asking price is at a P/E of around 33.51. Thus the issue appears highly-priced discounting all near-term positives. 

DIVIDEND POLICY:
The company has not paid any dividends in the reported periods of the offer document. It will adopt a prudent dividend policy post-listing, based on its financial performance and future prospects.

COMPARISON WITH LISTED PEERS:
As per the offer document, SPL has shown Rishi Tech, Jumbo Bag, SMVD Poly, Emmbi Ind., and Commercial Syn Bag as their listed peers. They are currently trading at a P/E of 14.90, 6.11, 14.82, 10.13, and 8.13 (as of December 26, 2022). However, they are not truly comparable on an apple-to-apple basis.

MAJOR POINTS OF CONCERN:
The points of major concern are, a group company Aeroflex Industries Ltd. is appearing in the willful defaulter's list of RBI, higher debt, likely clash of interest with one of the group companies and also one of the subsidiaries due to their carrying similar business, the sustainability of super profits going forward, and its operation in a highly competitive segment. 

As clarified by the management, the Aeroflex matter is given in DRHP on the basis of pre-takeover by the group, but as per the current status, it is revived after clearing all claims and is put back on track.

MERCHANT BANKERS TRACK RECORDS:
The BRLM associated with the offer has handled 8 public offers in the past three fiscal years (including the ongoing one), out of which 1 offer closed below the offer price on the listing date.

Clarification on review comments by the company representatives

Competition

Our business model is based on our approach of asset light model which help us scale, optimizing shareholders return.


Sudden increase in net profit
  1. There has been change in the business strategy where Sah is actively pushing the product portfolio with Increase in high value added products in the product mix thus improving the overall margins
  2. We are outsourcing semi-finished product from third party at competitive price to feed our increased finishing capacity and expanding our market reach globally to increase the topline of the company and attain the optimum utilsation of capacity.
  3. It would be important to note that our new manufacturing facility has already completed the trial production and commercial production will commence by mid January 2023 hence revenue will significantly increase further based on the doubled capacity.

High PE ratio and Valuation concern
  1. Sah has higher margins and return ratios as compared to the peer group companies. Our net profit margin of 5.43%, RoE of 16.42% for FY22 is one of the highest in the industry.
  2. Last allotment to promoter was in March 2018 at the price of INR 30 per share. Since then there was no allotment of equity or issue of bonus shares to promoters and the company has transformed its business model significantly and is on a high growth trajectory as reflected in its revenue, PAT, etc. Further it would be important to note that company has almost completed the capex of the new manufacturing facility which will double the capacity of company.

Similar business in group co.

Our group co. (Fibcorp Polyweave), subsidiary of Sah Polymers (51%), would be supplying 'Industrial category bags' and our new unit would be supplying high end usage bag, Hence after acquisitipon of Fibcorp we have better product portfolio in order to serve our existing/perspective customers. Being Subsidiary of Sah, profits derived from Fibcorp will accrure to Sah only.


Gimmick

The split and consolidation of shares between 2009 and 2011 has been done as a part of restructring exercises. It has no impact on the financials/performance of the company. Company's Networth effectively after the above excersie was same.


Aeroflex Default

Please note that group has history of acquisitions and successfully scaling them up, thus generating stakeholders return. Aeroflex was one such acqusition which was made by the group. Aeroflex was a willful defaulter before the acquisition. We not only revived aeroflex but also scaled it up, paid off all the pending dues of aeroflex and made it profitable and dividend paying.


Conclusion / Investment Strategy

The company is operating in a highly competitive segment with two of its group company having an interest in a similar business. There are many other points of concern. Even based on its super earnings the issue is highly-priced. Initial listing in the “T” group may curtail speculative movements in the initial period. There is no harm in skipping this pricy bet.

Reviewer recommends Avoid to the issue.

Review By Dilip Davda on Dec 26, 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. Any reader taking decisions based on any information published here does so entirely at its own risk. Investors should bear in mind that any investment in stock markets is subject to unpredictable market-related risks. The above information is based on RHP and other documents available as of date coupled with market perception. The author has no plans to invest in this offer.

(SEBI registered Research Analyst-Mumbai).


About Dilip Davda

Dilip Davda, a freelance journalist

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

Sah Polymers IPO FAQs

  1. 1. Why Sah Polymers IPO?

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

  2. 2. How is Sah Polymers IPO?

    Read the Sah Polymers IPO recommendations by the leading analyst and leading stock brokers.

  3. 3. Sah Polymers IPO what should investors do?

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

  4. 4. Is Sah Polymers IPO good?

    Our recommendation for Sah Polymers IPO is to avoid.

  5. 5. Is Sah Polymers IPO worth Investing?

    As per the analysis by our lead analyst Mr. Dilip Davda, we suggest you to avoid the Sah Polymers IPO.

  6. 6. When will Sah Polymers IPO allotment status?

    The Sah Polymers IPO allotment status will be available on or around Jan 9, 2023. The allotted shares will be credited in demat account by Jan 11, 2023. Visit Sah Polymers IPO allotment status to check.

  7. 7. When will Sah Polymers IPO list?

    The Sah Polymers IPO will list on Thursday, January 12, 2023, at BSE, NSE.

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