One Liner: Neither a Gem Nor a Veer

IPO Size: Rs. 165 cr

• Rs. 135 cr Fresh Issue for working cap (Rs. 85 cr)
• Rs. 30 cr Offer for Sale (OFS) by promoter (86% to drop to 55% post IPO)

Price band: Rs. 93-98 per share

M cap: Rs. 475 cr, implying 35% dilution

IPO Date: Mon 4^th Sep to Wed 6^th Sep 2023, Listing: Mon 11th Sep 2023

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

Stainless Steel Products Manufacturer

Gujarat based Ratnaveer Precision Engineering, formerly Ratnaveer Metals, manufactures stainless steel products like finishing sheets, washers, tubes and pipes, with finishing sheets accounting for approximately 65%, washers ~20% and tubes and pipes roughly 10% of revenue. It has 4 plants in Gujarat (Vadodara and Ahmedabad) and is expanding to stainless steel circlips at a new facility adjoining Vadodara unit, but not much details shared of this capex.

Dull Financials

• Between FY21-23, company’s revenue grew at 15% CAGR on improved realization due to rising commodity prices in covid, with production volume remaining flat for finishing sheets and declining for the higher-value-add products of washers and tubes and pipes.
• There is not much ‘engineering’ in its business model, with raw material and component cost accounting for ~90% of revenue. Thus, business is high-volume and low margin, with scale also not large, at Rs. 480 cr revenue in FY23.
• FY23 EBITDA stood at Rs. 47 cr, jumping to 9.8% EBITDA margin (against historic average of 6.7%). Rs. 25 cr PAT was reported for FY23, with net margin rising to 5.2%, from an average of 2.1% in FY20-22. Share jump in margin just prior to IPO, without any change in business mix, is unnerving.

Pale Fundamentals

• Top 10 customers accounted for 50% of FY23 revenue, highlighting concentration risks.
• Business is highly working capital intensive, with high inventory on books (~5 months outstanding), leading to a lacklustre RoCE of 12.6%.
• With Rs. 200 cr net debt, company’s net debt to equity ratio of 1.7:1, as of 31.3.23, is high. Post listing, it will be 0.8:1 even after net worth expanding by Rs. 135 cr. Also, company’s credit rating of BBB+ is the lowest possible investment grade.  

Expensive Pricing

On FY23 EPS of Rs. 7.3, shares are being offered at a historic PE multiple of 13.5x, which is seen very expensive. Integrating steel manufacturer Sarda Energy, having captive coal and iron ore mines, reported 14% net margin in FY23 and is ruling at a historic PE multiple of 12.5x. Thus, Ratnaveer’s double digit PE multiple is not sustainable in the long term.

Company has undertaken 2 pre-IPO placements to Individual Investors at Rs. 72 per share in Jan 2023 (raised Rs. 5 cr) and at Rs. 67 per share in Dec 2022 (raised Rs. 67 cr), but we are unable to justify this 36% premium in 7 months.

Ratnaveer is a small metal company, without any significant moats, operating in a very competitive and fragmented industry with low barriers to entry. Its post-listing m cap will be just Rs. 475 cr making it a nano cap stock, subject to additional stock exchange surveillance.