Verdict: Not ready to sprout yet

IPO Snapshot:

ShreeOswal Seeds is entering the primary market on Thursday 7^th June 2018 to raise Rs. 12 crore via fresh issue of up to 46 lakh equity shares of Rs. 10 each in the price band of Rs. 25 to Rs. 26 per share. Representing 30.02% of the post issue paid-up share capital, issue will close on Tuesday 12^th June and listing on NSE Emerge (SME exchange) is likely on 20^th June.

Company Overview:

ShreeOswal Seeds sells agricultural seeds (wheat, mustard, black gram, corn and isabgol/psyllium), maize and soyabean under own brand ‘Oswal’ to farmers, through a dealer network of 6,000, in the states of Madhya Pradesh, Maharashtra, Rajasthan, Bihar, Uttar Pradesh. Having a processing unit in Madhya Pradesh, company procures raw material under contract farming arrangements in Madhya Pradesh. Company has acquired its present form in Dec 2017, prior to which it operated as a partnership firm of the two promoters.

Objects of Issue:

Fresh issue proceeds of Rs. 12 crore are proposed to be used for:

1. Purchase of Machinery Rs. 1.63 crore
2. Working Capital Rs. 6.25 crore
3. General corporate purposes Rs. 4.02 crore

Shareholding Pattern:

2 promoters, along with their family members, hold nearly 100% stake in the company, which will reduce to approximately 70% post IPO. Public will own about 30% stake.

Financial Performance:

FY18 standalone revenue grew 12% YoY to Rs. 48 crore, leading to an EBITDA of Rs. 4.5 crore (9.3% EBITDA margin) and net profit of Rs. 1.8 crore (3.7% net margin). However, up to FY16, company’s net margins were less than 1% (for the 4 years published data), despite revenues ranging between Rs. 40-60 crore. FY18 consolidated revenue, which includes 4 months of psyllium sales, pursuant to purchase of a psyllium selling partnership firm, stood at Rs. 78 crore, with consolidated EBITDA of Rs. 6 crore (EBITDA margin 7.7%) and net profit of Rs. 2.3 crore (2.9% net margin). 

On an equity of Rs. 10.67 crore, company’s net worth stands at Rs. 12 crore (31-3-18), as there are no retained earnings (profits distributed among partners). Debt to equity ratio is quite steep at 2:1 (on gross debt of Rs. 25 crore), which will contract to 1:1 post equity expansion via IPO, which is still not low. Besides, business is highly working capital intensive, with inventory outstanding for over 5 months. At Rs. 26 per share, expected market cap is Rs. 40 crore with EV of Rs. 63 crore, translating into PE multiple of 12x on FY18 basis and 8x on FY19 expected earnings.

Positive:

• Diversification from soyabean and wheat: Soyabean and wheat, accounting for nearly 100% of revenues till FY17, contributed to 39% and 25% of FY18 consolidated revenue respectively, with the addition of export-focused psyllium from Dec 2017, diversifying product basket. 

Negatives:

• Slim margins of sub 3% (FY18 net) as material cost makes up over 90% of topline, unlike peers like Monsanto, Kaveri Seeds and Mangalam Seeds operating in double digit margins. Margins indicate that company is still a commodity player, and will take time to mature into a branded seed supplier.
• Unsecured loan of Rs 4.6 crore from promotes was converted into equity, in Feb 2018, at near face value (conversion price of 10.25 for face value Rs. 10 each), leading to increased stake of promoters just before IPO, when IPO price is 2.5x the conversion price. 

Conclusion:

Small size and muted sentiments in the micro-cap universe make the issue unattractive. Hence, one can skip this SME issue. 

Disclosure: No interest.