Shanti Spintex BSE SME IPO review (May apply)

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Review By Dilip Davda on December 16, 2023

•    SSL in in the manufacturing and marketing of denim fabrics.
•    It operates in a highly competitive and fragmented segment.
•    It has posted growth in its top and bottom lines for the reported periods. 
•    Based on FY24 annualized earnings, the issue appears reasonably priced. 
•    Well-informed investors may park funds for the medium to long term rewards.

ABOUT COMPANY:
Shanti Spintex Ltd. (SSL) is primarily engaged in manufacturing and selling of denim fabrics. It began business as a fabrics trading concern (FY15) and turned manufacturer (FY16).  As of the date of this Red Herring Prospectus, it had 96 airjet looms installed at Dholi unit which has an annual installed capacity of weaving 1,92,72,000 mtrs. of denim fabrics. 

Weaving is the process of converting yarn into fabrics wherein two distinct sets of yarns or threads are interlaced at right angles to form a fabric. The airjet looms installed by it utilize a technique where a jet of compressed air is used to insert the weft (crosswise) yarn into the warp (lengthwise) yarn to create the raw fabrics also known grey fabrics.

SSL manufactures various type of denim fabrics such as power stretch spandex denim, knit denim, light weight denim, rigid denim, over dyed denim and flat finish 3/1 denim. Its production facility has capability to produce grey fabrics in various designs such as twill weave, knit dobby weave, structure dobby weave, broken twill weave and satin weave. The company offers denim fabrics in diverse spectrum of shades such as indigo blue, IBST, Sulphur black, Sulphur grey, halogen blue and ecru colour which has weights ranging from 4.50 Oz/sq. yd. to 14.50 Oz./sq. yd. and widths spanning from 62" (157cm) to 78" (198 cm).

Its operations encompass utilization of diverse type of yarns such as cotton yarn, ring yarn, viscose yarn, slub yarn, cotton spandex, polyester spandex, tencel, lyocell etc. which are procured by it from domestic market. In addition to yarn, it also directly procures grey fabrics from the market, which are subsequently sent for finishing, and is then sold to customers. The company outsources the yarn dyeing and grey fabrics finishing process to third parties. Currently, it derives almost 100% of revenue from Gujarat based customers which are either manufacturers, wholesalers or traders. As of November 30, 2023, it had 72 employees on its payroll.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden combo book building route IPO of 4464000 equity shares of Rs. 10 each worth Rs. 31.25 cr. (based on the upper cap). The issue consists of 2688000 fresh equity shares issue (worth Rs. 18.82 cr. at the upper cap) and an Offer for Sale of 1776000 shares (worth Rs. 12.43 cr. at the upper cap). The company has announced a price band of Rs. 66 - Rs. 70 per share. The issue opens for subscription on December 19, 2023, and will close on December 21, 2023. 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 26.43% of the post-IPO paid-up capital of the company. From the net proceeds of the fresh equity issue, the company will utilize Rs. 18.00 cr. for working capital and the rest for general corporate purposes.

Hem Securities Ltd. is the sole lead manager for this issue and KFin Technologies Ltd. is the registrar of the issue. HEM Group's Hem Finlease Pvt. Ltd. is the market maker for the company.

Having issued initial equity shares at par value, the company issued further equity shares in the price range of Rs/ 30.00 - Rs. 60.00 between March 2016 and October 2017.It has also issued bonus shares in the ratio of 1 for 1 in August 2023. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 15.00, Rs. 19.91, Rs. 19.92, and Rs. 27.00 per share.  

Post-IPO, SSL's current paid-up equity capital of Rs. 14.20 cr. will stand enhanced to Rs. 16.89 cr. Based on the upper cap of IPO price band, the company is looking for a market cap of Rs. 118.22 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, SSL has posted a total income/net profit of Rs. 112.94 cr. / Rs. 3.38 cr. (FY21), Rs. 255.27 cr. / Rs. 4.87 cr. (FY22), and Rs. 370.71 cr. / Rs. 10.13 cr. (FY23). For H1 of FY24 ended on September 30, 2023, it earned a net profit of Rs. 5.24 cr. on a total income of Rs. 162.38 cr.  

For the last three fiscals, the company has reported an average EPS of Rs. 5.10 and an average RoNW of 13.91%. The issue is priced at a P/BV of 1.62 based on its NAV of Rs. 43.11 as of September 30, 2023. The IPO price band ad is missing post-IPO NAV data on the lower and the upper cap of price band.

If we attribute FY24 annualized earnings on post-IPO fully diluted paid-up equity capital of the company, then the asking price is at a P/E of 11.29. The issue appears reasonably priced. 

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 Jindal Worldwide, R & B Denims, Manomay Tex, and United Polyfab as their listed peers. They are trading at a P/E of 93.14, 27.73, 21.61, and NA (as of December 15, 2023). However, they are not comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
This is the 36th mandate from Hem Securities in the last three fiscals. Out of the last 10 listings, all opened with a premium ranging from 10.57% to 125% on the listing date. 

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