What you must know about Karnika Industries IPO?

Karnika Industries Ltd was incorporated in the year 2017 and is into the manufacture and export of garments. Formerly, the company was known by the name, Karni International. The company largely focuses on kids’ wear and this includes; shorts, joggers, capri, tees, rompers, sleepsuits, pyjamas, winter wear, etc. Its manufacturing units are largely self-sufficient and are capable of handling designing, preparation of samples, actual manufacture, quality inspection, ironing, and packing of garments. The company also has the requisite hi-tech machines and tools required for a modern garment manufacturing unit. Its products are sold under the KARNIKA brand and it has a strong customer franchise in India and abroad. Some of its key in-house brands include Karnika Care, Karnika Cool, Karnika Club etc.

Key terms of the SME IPO of Karnika Industries Ltd

Here are some of the highlights of the Karnika Industries IPO on the SME segment of the National Stock Exchange (NSE).

• The issue opens for subscription on 29th September 2023 and closes for subscription on 04th October 2023; both days inclusive.
   
• The company has a face value of ₹10 per share and it is a fixed price issue. The issue price has been fixed at ₹76 per share. Since it is a fixed price issue, there will be no price discovery required in this case.
   
• The IPO of Karnika Industries Ltd has only a fresh issue component and no offer for sale (OFS) component in the IPO. It must be remembered that the fresh issue portion is EPS dilutive and equity dilutive, but OFS is just a transfer of ownership and  hence it is not EPS or equity dilutive.
   
• As part of the fresh issue portion of the IPO, Karnika Industries Ltd will issue a total of 32,99,200 shares (32.99 lakh shares approximately). At the fixed price of the IPO price of ₹76 per share, the total value of the fresh issue portion aggregates to ₹25.07 crore.
   
• Since there is no offer for sale portion, the fresh issue will also be the total size of the issue. As a result, the total issue size of Karnika Industries Ltd will also entail the issue and sale of 32,99,200 shares (32.99 lakh shares approximately). At the fixed IPO price of ₹76 per share, the total size of the IPO of Karnika Industries Ltd will be₹25.07 crore.
   
• Like every SME IPO, this issue also has a market making portion with a market maker inventory. The company has allocated 1,66,400 shares as part of the market maker inventory. Spread X Securities has been appointed as the market maker to the issue. The market maker will provide two-way quotes to ensure liquidity on the counter post listing and also ensure that the basis cost remains low, with continuous bids and asks quotes.
   
• The company has been promoted by Niranjan Mundhra, Shiv Shankar Mundhra and Mahesh Kumar Mundhra. The promoter holding in the company currently stands at 100.00%. However, post the fresh issue of shares, the promoter equity holding share will get diluted to 73.39%.
   
• The fresh issue funds will be used by the company for funding the working capital gaps and for general corporate purposes. This is a business that generally tends to be working capital intensive.
   
• While Beeline Capital Advisors Private Ltd will be the lead manager to the issue, Skyline Financial Services Private Ltd will be the registrar to the issue. The market maker for the issue will be Spread X Securities.

IPO allocation and minimum lot size for investment

Out of the total shares on offer, the company has allocated 1,66,400 shares for the market maker for providing liquidity post listing and reducing basis risk. The net offer (net of market maker allocation) will be distributed between the retail investors and the HNI / NII investors. The table below captures the gist of the IPO allocation to various categories.

The minimum lot size for the IPO investment will be 1,600 shares. Thus, retail investors can invest a minimum of ₹1,21,600 (1,600 x ₹76 per share) in the IPO. That is also the maximum that the retail investors can invest in the IPO. HNI / NII investors can invest a minimum of 2 lots comprising of 3,200 shares and having a minimum lot value of ₹2,43,200. There is no upper limit on what the QIBs as well as what the HNI / NII investors can apply for. The table below captures the break-up of lot sizes for different categories.

Key dates to be aware of in the Karnika Industries Ltd IPO (SME)

The SME IPO of Karnika Industries Ltd IPO opens on Friday, September 29th, 2023 and closes on Wednesday, October 04th, 2023. The Karnika Industries Ltd IPO bid date is from September 29th, 2023 10.00 AM to October 04th, 2023 5.00 PM. The Cut-off time for UPI Mandate confirmation is 5 PM on the issue closing day; which is October 04th, 2023.

It must be noted that in ASBA applications, there is no refund concept. The total application amount is blocked under the ASBA (applications supported by blocked amounts) system. Once the allotment is finalized, only the amount is debited to the extent of the allotment made and the lien on the balance amount is automatically released in the bank account.

Financial highlights of Karnika Industries Ltd

The table below captures the key financials of Karnika Industries Ltd for the last 3 completed financial years.

Data Source: Company DRHP filed with SEBI

One thing that follows from the financial statement is that most of the growth has come in the last 2 years. The company has reported net margins of over 6.56% in the current year, which is better than the previous years. The ROE is attractive at over 40% and the economics should improve further if the company is able to sweat its assets at a consistently good rate as it is likely to be able to do once the sales momentum picks up. Asset turnover is already above 1, despite the sharp spike in the asset size in the current year The one area of concern is the total debt, which his more than 50% of the asset size and which is almost 7 times the profits. That is likely to keep the pressure on the net profit margins.

One can either look at the company valuations based on current EPS or weighted average EPS of last 3 years. By the former measure, the P/E is around 8X and it is around 15X if you look at the average earnings. That is not a concern. The only concern on the company is the high level of debt and that is something the investors must look at with some degree of caution since the latest IPO is not being used to reduce the debt, so the cost of debt will continue to be an overhang on the profits in the future also. Investors planning to look at investing in the IPO must closely monitor the debt level and cost of debt.