IPO Size: Rs. 224 cr, entirely Fresh Issue  

• For working capital requirement of Rs. 130 cr

Price band: Rs. 26-28 per share

M cap: Rs 840 cr, implying 27% dilution  

IPO Date: Thu 29^th Feb 2024 to Mon 4^th Mar 2024, Listing Thu 7^th Mar 2024

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

Fish Protein Manufacturer

Mukka Proteins enjoys ~25% market share of fish protein (comprising fish meal, fish oil and fish soluble paste) industry in India, which is used by aqua feed, poultry feed and pet food industry. It has 4 manufacturing facilities in India (in Karnataka and Gujarat) and 2 in Oman, with an aggregate manufacturing capacity of 1.15 lakh MTPA for fish meal, 16,950 MTPA of fish oil and 20,340 MTPA of fish soluble paste. 60% of Rs. 1,200 cr revenue of FY23 was earned through exports, mainly to Vietnam, Taiwan and China. Product-wise, fish meal accounts for ~82% revenue.

Improved Financials

Sale volume of fist meal has risen at 13% CAGR between FY20 to FY23, which coupled with better realization, led to revenue growth at 29% CAGR, from Rs. 549 cr in FY20 to Rs. 1,177 cr in FY23. H1FY24 revenue stood at Rs. 606 cr. Operating at ~10% EBITDA margin and 5% net margin, PAT stood at Rs. 48 cr and Rs. 33 cr for FY23 and H1FY24 respectively.

H2 is seasonally a stronger period – just to give a sense, during FY23, Q4 accounted for 35% and 46% of annual revenue and PAT respectively. Thus, outlook for H2FY24 appears bright.

Business Risks and Concerns

1. Even after Rs. 48 cr net profit and Rs. 60 cr cash profit in FY23, debt is not reducing. It has rather doubled to Rs. 318 cr as of 30.9.23, from Rs. 159 cr as of 31.3.20.
2. Debt rating of BBB+ by ICRA is not the best. Current net debt to equity ratio of 1.5x is elevated, and even post issue, will remain at 0.7:1, which is not low.
3. Business is working capital intensive – with inventory outstanding of 2.5 months and debtors of nearly 1.25 months. Thus, funds are being raised by diluting equity.
4. Company’s prime manufacturing facility in Karnataka is under litigation since 2021, for alleged flouting of environmental laws. Any adverse decision can prove to be fatal, as this facility accounts for majority revenue besides going against ESG (environmental, social and governance) good practices.   
5. Promoter has a FEMA case worth Rs.17 cr pending, since 2022.

Objects of Issue not Adding Up

Of the IPO proceeds, working capital requirement is Rs. 130 cr (including Rs. 10 cr investment in associate company for its working capital), representing 58% of gross proceeds. Even if 25% goes towards general corporate purposes (Rs. 56cr), residue Rs. 38 cr for IPO expenses appears abnormally high. This doesn’t seem to be an oversight and reflects poorly on company management and merchant banker Fedex.

Valued Lower than Peer

Based on H1FY24 EPS of Rs. 1.5, FY24E estimated EPS is at around Rs. 3.4. Shares are being issued at a current year PE multiple of 9x, which is undervalued for 34% RoE and also in relation to a PE multiple of 20x for peer Avanti Feeds.