Sai Swami Metal BSE SME IPO review (May apply)

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Review By Dilip Davda on April 27, 2024

•    The company is engaged in trading and marketing of stainless steel products and kitchenware.
•    The general business of trading is of high volume/low margin nature. But it mulls major business in kitchenware, a high margin segment.
•    The trends are established in 9M-FY24 performance and the management is confident of sustaining the same going forward.
•    Based on annualized FY24 super earnings, the issue appears fully priced. 
•    Well-informed investors may park funds for the medium to long term rewards.

ABOUT COMPANY:
Sai Swami Metals & Alloys Ltd. (SSMAL) is actively involved in the trading and marketing of a comprehensive array of stainless steel products, addressing the diverse needs of discerning customers. Its product line is specifically designed to encompass a wide range of kitchenware, including Dinner Sets, S.S. Casseroles, S.S. Multi Kadai, S.S. Water Bottles, Stainless Steel Sheets, Stainless Steel Circles, and various types of utensils. It is also engaged in trading of basic raw material like S.S. Patta, S.S. Sheet, S.S. Coil, S.S. Scrap, S.S. Pipe, M.S. Round (Mild Steel Round) and M.S. beam and so on for various customers. 

These products showcase Company's commitment to providing high-quality stainless steel kitchenware that spans a wide spectrum of categories. With a focus on innovation and quality, its offerings are crafted to meet the unique preferences and requirements of diverse customer base. The
Company and its two subsidiaries i.e. Bhagat Marketing Private Limited and Dhruvish Metals LLP are specializing in the trading and marketing of stainless steel kitchenware products through the distinguished brand "DOLPHIN." 

According to the management, while its general business is of high volume/low margin nature, but its added product portfolio of kitchenware is high margin business and the major thrust is given for this segment with adding latest machineries and new models/designs, the company hopes to maintain the trends shown for 9M-FY24. It plans Pan India presence in Tier II and Tier III cities where it finds more demand for its products. 

Employing an outsourcing model, the business collaborates with Dhruvish Metals LLP, a subsidiary company of Sai Swami Metals and Alloys Limited, to source complete kitchenware products. Dhruvish Metals manufactures all kitchenware products, including comprehensive packaging, which is then sent to Sai Swami for further sales and distribution. This end-to-end approach underscores the commitment to delivering high-quality products to customers, emphasizing a streamlined and quality-centric production process through the strategic integration of subsidiary company. 

The synergy between Sai Swami and Dhruvish Metals ensures efficiency and excellence, strengthening the brand's market positioning. As of March 31, 2024, it had just 7 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden IPO of 2500000 equity shares of Rs. 10 each at a fixed price of Rs. 60 per share to mobilize Rs. 15.00 cr. The issue opens for subscription on April 30, 2024, and will close on May 03, 2024. The minimum application to be made is for 2000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. The issue constitutes 37.78% of the post-IPO paid-up capital of the company. The company is spending Rs. 1.00 cr. for this IPO process and from the net proceeds of the IPO, it will utilize Rs. 6.00 cr. for working capital, Rs. 4.00 cr. for investment in subsidiary, Rs. 2.00 cr. for purchase of machineries, and Rs. 2.00 cr. for general corporate purposes. 

The issue is solely lead managed by Swastika Investmart Ltd., and Bigshare Services Pvt. Ltd. is the registrar of the issue. Sunflower Broking Pvt. Ltd. is the market maker for the company. While Swastika Invest has underwritten issue to the tune of 15%, Sunflower has underwritten up to 85%.

The company has issued/converted entire equity capital at par value so far. The average cost of acquisition of shares by the promoters is Rs. 10 per share. 

Post-IPO, company's current paid-up equity capital of Rs. 4.12 cr. will stand enhanced to Rs. 6.62 cr. Based on the upper IPO price band, the company is looking for a market cap of Rs. 39.71 cr.  

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, as a proprietorship firm, it has posted a total revenue/net profit of Rs. 7.51 cr. / Rs. 0.05 cr. (FY21), Rs. 8.84 cr. / Rs. 0.52 cr. (FY22), and Rs. 6.25 cr. / Rs. 0.37 cr. (FY23). For 9M of FY24, it earned a net profit of Rs. 0.94 cr. on a total revenue of Rs. 14.35 cr. Thus it posted inconsistency in its top and bottom lines as a proprietorship firm that posted a sudden boost for 9M of FY24.

On a consolidated basis, for FY23 it posted a total revenue of Rs. 6.27 cr. with a net profit of Rs. 0.04 cr., and for 9M of FY24 ended on December 31, 2023, it earned a net profit of Rs. 1.80 cr. on a total revenue of Rs. 33.34 cr. The sudden boost in its top and bottom lines for 9M of FY24 raise eyebrows and concern over its sustainability. According to the management, its obsolete machinery prevented their growth post pandemic, but with switch over to new machineries, it has started gaining ground and is confident of sustaining the trends marked for 9M-FY24. It has now major thrust for kitchenware, a high margin product with wide range and style to meet customer demands.  

For the FY23 period (post its turning public limited company), it has reported an EPS of Rs. 38.28, and an average RONW of 10.84%. The issue is priced at a P/BV of 3.07 based on its NAV of Rs. 19.57 as of December 31, 2023, and at a P/BV of 1.63 based on its post-IPO NAV of Rs. 36.72 per share.

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 16.58. Based on FY23 earnings, the P/E stands at 101.70 indicating aggressive pricing.

For the reported periods, the company has posted PAT margins of 0.61% (FY23), 5.38% (9M-FY24), and the offer document is missing RoCE margins data for the referred periods. 

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 TTK Prestige as their listed peer. It is trading at a P/E of 42.7 (as of April 26, 2024). However, they are not comparable on an apple-to-apple basis.

MERCHANT BANKER'S TRACK RECORD:
This is the 9th mandate from Swastika Invest in the last four fiscals (including the ongoing one), out of the last 8 listings, 2 opened at discount, 1 at par and the rest with premiums ranging from 4.17% to 39.86% on the day of listing. There is some mismatch in merchant banker's track record date on page 164 of the offer document. 

Sai Swami Metals and Alloys IPO FAQs