Verdict: No Eureka here  

IPO Snapshot

Nureca is launching a Rs. 100 crore IPO between Mon 15^th Feb 2021, to Wed 17^th Feb, in the price band of Rs. 396-400 per share. The 100% fresh issue has only 10% reserved for retail, against otherwise 35%. Since it’s a profit making company with positive net worth, surprising to see 75% issue reserved for institutional investors, against general 50% norm. Issue represents 25% of post-issue capital, with listing on 26^th Feb.

B2C supplier of Medical Devices

Nureca is a 4 year old company, generating 95% of sales from e-commerce under Dr Trust brand, while negligible chemist channel sales. Between FY18-20, sales rose 5x from Rs. 20 crore to Rs. 99 crore, but PAT margin declined from 16% to 6%, highlighting lack of pricing power and high competition pressure. Medical home device market is highly competitive with sizeable market share captured by larger brands, such as Omron, Phillips, Dr Morepen, BPL, whereas company is just a marginal player. As a precursor to the IPO, all 3 independent directors were appointed to the board only in Oct 2020, which does not speak too well.

Covid a temporary blessing for this oximeter selling company

During FY18 to FY20, company clocked annual PAT between Rs. 3-Rs. 6 crore. In H1FY21, Covid led to super normal profits of Rs. 36 crore, thanks to bumper demand for pulse oximeters, infrared thermometers etc. However, these devices have low repeat purchase value (unlike mask and sanitizer which are more ‘frequent purchases’). Most FMCG companies have already withdrawn from sanitizer market in Q3FY21, with initial euphoria dying down. But, covid was a standalone opportunity for the company and not a structural one, due to fragmented nature of the market for not-so-strong brands. Once covid wave slows down (which fortunately seems to be the case for India), company’s profits will normalize to annual Rs. 12-Rs. 15 crore run-rate, making long term prospects not very exciting.

Exceptional H1FY21 Cannot be Extrapolated

Q2FY21 revenue of Rs. 92 crore, nearing FY20’s Rs. 99 crore revenue, lead to bumper jump in net margin to 29%. Thus, H1FY21 revenue grew to Rs. 122 crore, with 30% PAT margin and EPS of Rs.52 against FY20’s EPS of Rs. 9. Due to exceptional sales, H1FY21 can not be the benchmark for valuation. Assuming moderate growth over FY20’s Rs. 99 crore revenue and 6% margin, sustainable EPS is closer to Rs. 15, which leads to a PE multiple of 27x on FY22E, which is very expensive, due to single digit margins, even if RoE is high on asset light business.

Steep Valuation Unjustified

At Rs. 400 per share, market cap will be Rs. 400 crore, which is 4x jump on last transacted price in 4 months, when last preferential allotment was made in Oct 2020 at Rs. 100 per share. Since financials for Oct 2020-Jan 2021 are not disclosed, there is no way to justify this huge surge in valuation, also in the backdrop of H1FY21 revenue run-rate not being sustainable.

Moreover, company is not in need of funds for working capital, which is the object of fresh issue, as company has surplus cash of Rs. 45 crore, as of 30-9-20. When future growth rate itself is doubtful, planning working capital on that basis becomes futile.

Conclusion:

Small cap stock listing in T2T segment, expensive and unjustified pricing, weak competitive positioning, make this IPO appear opportunistic on the company’s part to merely ride the current market boom. Hence, we strongly advise investors to stay away from the IPO.

Grey Market Premium (GMP) of Nureca: Grey Market Premium of Nureca is an unofficial figure, against guidelines of SEBI and we are strongly against it. To know how it operates, read our article ‘grey market premium’.

Disclosure: No Interest.