What you must know about Refractory Shapes IPO?

Refractory Shapes Ltd was incorporated in 1973 to produce special shapes, custom made refractory shapes & ceramic balls of low and medium purity with superior performance. The company has a state of the art plant located at Pune with the most modern equipment to produce refractory shapes and castables of highest standards. The plant is fully integrated and refractory aggregates from carefully selected and processed raw material are also produced at the plant, giving it an edge over other manufacturers. Refractory Shapes Ltd also has a sophisticated laboratory with facilities to carry out chemical analysis and physical. test, and to monitor quality at every stage of the manufacturing life cycle. This has enabled standardization of quality. In 2021, Refractor Shapes commissioned a new plant at Wankaner in Gujarat, spread across 10 acres of land.

Refractory Shapes Ltd is a pioneer in manufacturing dome bricks, hexagonal tiles, circle bricks, alumina lumps of High Purity for Fertilizer Industries etc. Over the last 50 years, Refractory Shapes Ltd has created an army of artisans and craftsmen with honed skills. The products of Refractory Shapes Ltd have diverse applications. For instance, they find application in a diverse range of industries, including steel, cement, glass, petrochemicals, and many more. The company's refractories are specifically engineered to endure the harsh conditions of these industries. This, in turn, contributes to enhanced operational efficiency and extended equipment life.

Key terms of the Refractory Shapes IPO 

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

• The issue opens for subscription on 06th May 2024 and closes for subscription on 09th May 2024; both days inclusive.
   
• The stock of the company has a face value of ₹10 per share and it is a book built issue. The price for the book built issue is set in the price band of ₹27 to ₹31 per share. Being a book built issue, the price will get discovered within this price band.
   
• The IPO of Refractory Shapes Ltd has only a fresh issue component and no offer for sale (OFS) 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 issue portion of the IPO, Refractory Shapes Ltd will issue a total of 60,00,000 shares (60 lakh shares), which at the upper band IPO price of ₹31 per share aggregates to fresh fund raising of ₹18.60 crore.
   
• Since there is no offer for sale (OFS) portion, the fresh issue size will also double up as the overall IPO size. Therefore, the overall IPO size will also comprise of the issue of 60,00,000 shares (60.00 lakh shares) which at the upper band IPO price of ₹31 per share will aggregate to overall IPO size of ₹18.60 crore.
   
• Like every SME IPO, this issue also has a market making portion with a market maker inventory allocation of 3,04,000 shares. Shreni Shares Ltd will be the market maker to the issue. The market maker provides two-way quotes to ensure liquidity on the counter and low basis costs, post listing.
   
• The company has been promoted by Dayashankar Krishna Shetty, Pratibha Dayashankar Shetty, and Prajna Shravan Shetty. The promoter holding in the company currently stands at 100.00%. However, post the fresh issue of shares in the IPO, the promoter equity holding share will get diluted to 72.48%.
   
• The fresh issue funds will be used by the company towards capex for civil construction required for the plant in Wankaner, capex for purchase of plant and machinery at Wankaner plant, purchase of commercial vehicles and for general corporate purposes.
   
• Shreni Shares Ltd will be the lead manager to the issue, and Bigshare Services Private Ltd will be the registrar to the issue. The market maker for the issue is Shreni Shares Ltd.

IPO allocation and minimum lot size for investment

Refractory Shapes Ltd has already announced the market maker allocation at 3,04,000 shares as inventory for market making. Shreni Shares Ltd will be the market maker for the IPO. The net offer (net of market maker allocation) will be divided between the retail investors and the HNI / NII investors. The breakdown of the overall IPO of Refractory Shapes Ltd in terms of allocation to various categories are captured in the table below.

The minimum lot size for the IPO investment will be 1,600 shares. Thus, retail investors can invest a minimum of ₹124,000 (4,000 x ₹31 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 8,000 shares and having a minimum lot value of ₹248,000. 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 Refractory Shapes IPO (SME)

The SME IPO of Refractory Shapes IPO opens on Monday, 06th May 2024 and closes on Thursday, 09th May 2024. The Refractory Shapes Ltd IPO bid date is from 06th May 2024 at 10.00 AM to 09th May 2024 at 5.00 PM. The Cut-off time for UPI Mandate confirmation is 5 PM on the issue closing day; which is 09th May 2024.

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. The credit of shares to the demat account on May 13th 2024, will be visible to investors under the ISIN Code – (INE0TNX01015).

Financial highlights of Refractory Shapes Ltd

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

Data Source: Company DRHP filed with SEBI

Here are some of the key takeaways from the financials of the company for the last 3 years.

• The revenues have grown at a steady p[ace in the last 2 years and in the latest year, the total sales has nearly doubled over FY21. That is robust growth in top line over the last two years. The net profit growth, however, has been fairly erratic.
   
• While net margins of the company have been relatively volatile, they have nearly halved in the current year FY23. PAT margins at 5.05% is still low, but that is the nature of the margins you can expect in this commodity driven business. The return on equity (ROE) has also fallen in the latest year to 11.49%, while the return on assets (ROA) has also been volatile, reporting 3.83% in the latest fiscal year.
   
• The asset turnover ratio or the sweating ratio has been above 1.20X and that is a good sign that sales have picked up to cover the asset outlays. However, this ratio may not be too relevant since this is a low asset intensive segment. OPMs  would be more useful in terms of its analytical value.

The company has latest year EPS of ₹1.21 and we have not included the weighted  average EPS, since the previous year data is not exactly comparable. However, the Weighted average EPS at ₹1.37 is only slightly better. The latest year earnings are being discounted by the IPO price of ₹31 per share at 25-26 times P/E ratio. One has to look at the P/E ratio from two perspectives. Firstly, the 6-months EPS for FY24 is much higher at ₹1.47, which makes the valuations look a lot more reasonable if the EPS is annualized and extrapolated at 10-11 times P/E ratio. However, the second issue to look at is the valuation at current levels is relatively high considering that this is predominantly a commodity business. If you want to consider the next year EPS extrapolated, it would be a forward looking risk and investors must do that cautiously. The business model may be robust, but the financials are volatile and the valuations are steep by peer group standards. The investors have to be cautious about taking a position in this IPO, and it must be done only after understanding all the risks.