Swaraj Suiting NSE SME IPO review (May apply)

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Review By Dilip Davda on March 11, 2022

•    SSL which was in cotton/synthetics fabrics now going for denim processing.
•    Based on its financial data, the issue is reasonably priced. 
•    Off late, the textile segment is witnessing investors' fancy. 
•    Investors may consider investment for the medium to long term. 

ABOUT COMPANY:
Swaraj Suiting Ltd. (SSL) was initially engaged in the manufacture of cotton/synthetic fabrics but later shifted to trading in synthetic fabrics in 2009 by selling off its Sulzer weaving looms to an associate concern, Swaraj Sulz Private Limited. It re-entered into manufacturing of Cotton and Synthetic fabrics in 2011 and commenced commercial operations in January 2013.

The company is presently, primarily engaged in the Manufacturing of Grey Fabric involving Cotton and Synthetic, Trading of Yarn, Grey fabric and Finished fabric and Weaving on Job work basis. Its existing manufacturing unit is located at F-483 to F-487, G1-475 to 476, RIICO Growth Centre, Hamirgarh, Bhilwara, Rajasthan - 311025. In this unit, SSL has installed 123 Airjet looms which translates into 1.50 million meters of cotton & synthetic fabric per month translating into 225 Lakh Meters Per Annum (LMPA). The Company has strategically planned the vertical integration of its operations to the next level of the supply chain, aiming to lower production costs and increase the efficiency of the company.

In view of this, the Company is in the advanced stages of setting up a project in the district of Neemuch, Madhya Pradesh (MP), which is both the backward and forward integration of its existing activity. The commencement of commercial production shall be between March - April 2022. This unit will manufacture premium quality denim fabric and tap new markets. The new manufacturing unit in MP is a denim processing plant with an annual capacity of converting approximately 21.75 million metric meters of denim fabric. The Total Cost of the project is Rs. 71.37 Crores, which is funded by Banks in the form of Term Loans to the extent of Rs. 43.00 Crores, Rs.18.82 crores will be sourced through Promoter's contribution including internal accruals and unsecured loans and balance Rs. 9.55 crores will be for Working Capital which will be funded by the issue proceeds. Currently, the company has 255 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its needs for working capital (Rs. 9.55 cr.), general corporate purpose (Rs. 0.63 cr.), SSL is coming out with a maiden IPO of 1908000 equity shares of Rs. 10 each at a fixed price of Rs. 56 per share to mobilize Rs. 10.69 cr. The issue opens for subscription on March 15, 2022, and will close on March 17, 2022. Minimum application is to be made for 2000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 26.50% of the post issue paid-up capital of the company. SSL will be spending Rs. 0.50 cr. for this IPO process. 

The issue is solely lead managed by Finshore Management Services Ltd. and Bigshare Services Pvt. Ltd. is the registrar to the issue. Nikunj Stock Brokers Ltd. is acting as a market maker for this company. 

Having issued initial equity shares at par, the company issued further equity in the price range of Rs. 20 to Rs. 200 per share between October 2003 and November 2021. It has also issued bonus shares in the ratio of 1 for 1 in December 2021. The average cost of acquisition of shares by the promoters is Rs. 24.57 and Rs. 31.21 per share. 

Post-IPO, SSL's current paid-up equity capital of Rs. 5.29 cr. will stand enhanced to Rs. 7.20 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 40.32 cr. 

FINANCIAL PERFORMANCE: 
On the financial performance front, on a consolidated basis, for the last three fiscals, SSL has posted turnover/net profits of Rs. 76.42 cr. / Rs. 2.19 cr. (FY19), Rs. 80.65 cr. / Rs. 3.54 cr. (FY20) and Rs. 60.22 cr. / Rs. 2.68 cr. (FY21). Thus is marked a minor setback for FY21 following the pandemic. Its bottom line has shown inconsistency. For the first six months of FY22 ended on September 30, 2021, it has earned a net profit of Rs. 1.91 cr. on a turnover of Rs. 81.72 cr. This boosting data for the IPO year raises concerns. 

For the last three fiscals, on a consolidated basis, SSL has posted an average EPS of Rs. 6.98 and an average RoNW of 8.73%. The issue is priced at a P/BV of 0.62 based on its NAV of Rs. 89.87 as of September 30, 2021, and at a P/BV of 0.69 based on its post-IPO NAV of Rs. 80.83. 

If we annualize FY22 earnings and attribute it to the fully diluted post-IPO paid-up equity capital, then the asking price is at a P/E of around 10.55. Thus the issue appears reasonably priced based on its earnings and BV data. 

COMPARISON WITH LISTED PEERS:
Surprisingly, SSL has not shown any listed peers in the offer documents. 

DIVIDEND POLICY:
The company has not declared any dividend for the covered period in the offer documents. 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 14th mandate from Finshore Management in the last three fiscals (including the ongoing one). Out of the last 10 listings, 2 opened at discount and the rest with premiums ranging from 3% to 65.5% on the day of listings. 

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