What you must know about Madhusudan Masala IPO

Madhusudan Masala Ltd is an established company engaged in the manufacturing, processing, and marketing of more than 32 different types of spices (in Hindi Masala refer to spices). These spices are sold under the popular brand names of "DOUBLE HATHI" and "MAHARAJA". The company has two broad business verticals. The first vertical is Ground spices; which includes different varieties of chilli powder, turmeric powder, coriander powder, cumin powder etc. The second vertical is for blended spices and this segment includes the focused item-specific blends like garam masala, tea masala, chhole masala, sambhar masala, pav bhaji masala, Kitchen King Masala, Chicken Masala, Meat Masala etc. It also sells pounded masalas like dry ginger powder, black pepper powder, Amchur, etc.

Key terms of the SME IPO of Madhusudan Masala Ltd

Here are some of the highlights of the Madhusudan Masala Ltd IPO on the SME segment of the National Stock Exchange (NSE).

• The issue opens for subscription on 18th September 2023 and closes for subscription on 21st September 2023; both days inclusive.
   
• The company has a face value of ₹10 per share and it is a book building issue. The issue price band for the fresh issue IPO has been fixed in the band of ₹66 to ₹70 per share. For all analysis purposes, the upper end of the price band has been considered.
   
• The IPO of Madhusudan Masala Ltd has only a fresh issue component with no book built portion. 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 portion of the IPO, Madhusudan Masala Ltd will issue a total of 34,00,000 shares (34 lakh shares), which at the upper end of the band price of ₹70 per share aggregates to a total fund raising of ₹23.80 crore.
   
• Since there is no offer for sale portion, the total size of the fresh issue will also be the total size of the IPO. Hence the total IPO size will comprise of 34 lakh shares, which at the upper end of the price band of ₹70 per share will aggregate to ₹23.80 crore.
   
• Like every SME IPO, this issue also has a market making portion with a market maker portion allocation of 1,72,000 shares. The market maker for the issue is Hem Securities Ltd and they will provide two-way quotes to ensure liquidity on the counter post listing and low basis costs.
   
• The company has been promoted by Dayalji Kotecha, Vijaykumar Kotecha, Rishit Kotecha, and Hiren Kotecha. The promoter holding in the company currently stands at 100%. However, post the fresh issue of shares, the promoter equity shareholding will reduce to 73.64%.
   
• The fresh issue funds will be used by the company for meeting its working capital funding gaps and for general corporate expenses. Part of the monies raised will also go towards meeting the expenses of the issue.       
   
• While Hem Securities Ltd will be the lead manager to the issue, KFIN Technologies Ltd will be the registrar to the issue. The market maker for the issue is Hem Securities Ltd.

IPO allocation and minimum lot size for investment

The company has allocated 50% of the issue size for the QIBs, 35% for the retail investors and the balance 15% for the HNI / NII investors or the non-retail investors in the IPO of Madhusudan Masala Ltd. The break up in terms of minimum and maximum allowed quota has been captured in the table below.

The minimum lot size for the IPO investment will be 2,000 shares. Thus, retail investors can invest a minimum of ₹140,000 (2,000 x ₹70 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 4,000 shares and having a minimum lot value of ₹280,000. 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 Madhusudan Masala Ltd IPO (SME)

The SME IPO of Madhusudan Masala Ltd IPO opens on Monday, September 18th, 2023 and closes on Thursday September 21st, 2023. The Madhusudan Masala Ltd IPO bid date is from September 18th, 2023 10.00 AM to September 21st, 2023 5.00 PM. The Cut-off time for UPI Mandate confirmation is 5 PM on the issue closing day; which is September 21st, 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 Madhusudan Masala Ltd

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

Data Source: Company DRHP filed with SEBI

The company has reported net margins of 4.5% in the current year, whereas in previous years the net margins were just around 1%, which raises serious questions about the ability of the company to sustain margins and valuations. The retail FMCG industry can be high margin in the branded segment but in the commoditized segment like the one that Madhusudan Masala Ltd operates, the pressure of margins can be quite high. Also, the ROE is attractive, but the net worth itself has been volatile. Even revenue growth has not been consistent in the last 3 years.

The traditional P/E model becomes difficult to apply in the case of Madhusudan Masala as the company has delivered a relatively better performance only in the latest year. Also, the P/E equations change drastically if the current year is included but remain unattractive if the latest FY23 year is not included. In valuation terms, the P/E is around 10X and that is reasonable for a company in this line of business. But, the big question is whether such valuations can be sustained by consistent growth in profits, in the absence of which the investors may not have much on the table. Localized brands have limited value in terms of market perception and that could be an overhang for the IPO investors. Investors should be wary about the IPO and would be advised to consult with their financial advisor to evaluate the fit into their risk appetite.