Uma Converter NSE SME IPO review (Avoid)

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Review By Dilip Davda on December 10, 2022

•    UCL is in the manufacturing and marketing of flexible packaging materials. 
•    Growth in the bottom line for FY21, in the pandemic year is a bit surprising. 
•    It is operating in a highly competitive and fragmented segment. 
•    Higher spending for the IPO process raises alarm.
•    There is no harm in skipping this issue. 

PREFACE:
The company originally filed for a mainboard book building process IPO worth Rs. 36.00 cr. for BSE and NSE listing with SEBI in June 2021, but later on, withdrew its plans. Now it is coming for an SME IPO for listing on NSE SME for Rs. 18.41 cr. Such moves indicate some fishy plans. Despite the improved performance, it is spending Rs. 3.00 cr. for SME IPO process hints at a lack of confidence in promoters'/lead managers.

ABOUT COMPANY:
Uma Converter Ltd. (UCL) is engaged in the manufacturing and marketing of flexible packaging material, which is multi-functional and caters to the packaging requirements of various industries. Its products are crafted out of an extensive range of industry-approved materials such as polyethylene terephthalate, biaxially-oriented polypropylene, polythene, cast polypropylene, foil, paper, bio-degradable films, etc.

UCL's product portfolio largely consists of multi-colour pouches, stand-up pouches, zip-lock pouches, vacuum pouches, paper bags, e-commerce bags, etc. Apart from manufacturing products for direct sale to customers, it is also engaged in manufacturing and carrying out various printing and lamination processes for third parties on a job-work basis. As of September 30, 2022, it has 441 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden IPO of 5580000 equity shares of Rs. 10 each at a fixed price of Rs. 33 per share to mobilize Rs. 18.41 cr. The company will use the net proceeds of the IPO funds for working capital (Rs. 10.81 cr.), and general corporate purposes (Rs. 4.60 cr.). The issue opens for subscription on December 15, 2022, and will close on December 21, 2022. The minimum application is to be made for 4000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 27.53% of the post-issue paid-up capital of the company. UCL is spending whooping Rs. 3.00 cr. This indicates that the funding arrangement is being done for subscriptions.

GYR Capital Advisors Pvt. Ltd. is the sole lead manager for this issue and Bigshare Services Pvt. Ltd. is the registrar of the issue. SMC Global Securities Ltd. is the market maker for this company. 

Having issued initial equity shares at par, the company issued further equity shares in the price range of Rs. 25 to Rs. 54 between January 2008 and March 2020. It has also issued bonus shares in the ratio of 3 for 5 in September 2018, and 1 for 1 in April 2019. The average cost of acquisition of shares by the promoters is Rs. 4.26, Rs. 6.00, and Rs. 7.48 per share. 

Post issue, UCL's current paid-up equity capital of Rs. 14.69 cr. will stand enhanced to Rs. 20.27 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 66.91 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, UCL has posted a turnover/net profit of Rs. 103.98 cr. / Rs. 2.92 cr. (FY20), Rs. 159.11 cr. / Rs. 4.45 cr. (FY21), and Rs. 187.21 cr. / Rs. 4.95 cr. (FY22).

For the first half of FY23 ended on September 30, 2022, it earned a net profit of Rs. 3.24 cr. on a turnover of Rs. 92.10 cr.  Growth posted for FY21, in the pandemic year raises eyebrows. 

For the last three fiscals, UCL has reported an average EPS of Rs. 3.04 and an average RoNW of 9.80%. The issue is priced at a P/BV of 1.01 based on its NAV of Rs. 32.75 as of September 30, 2022, and at a P/BV of 0.96 based on its post-IPO NAV of Rs. 34.43 per share. 

If we annualize FY23 earnings and attribute it to the post-IPO fully diluted equity base, then the asking price is at a P/E of around 10.31. The IPO appears fully priced based on its financial performance so far, however, the sustainability of margins raises concern as it is in a highly competitive and fragmented segment. 

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, UCL has shown U-Flex and Mold Tek Packaging as their listed peers. They are currently trading at a P/E of 16.81, and 40.81 (as of December 09, 2022). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
This is the 7th mandate from GYR Capital in the last two fiscals (including the ongoing one). Out of the last six listings, all opened with premiums ranging from 2.45% to 90.91% on the day of listing.

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