What you must know about Shree Karni Fabcom IPO?

Shree Karni Fabcom Ltd was incorporated in the year 2018 to produce customized knitted and woven fabrics for specific user industries. Some of the niche industries that Shree Karni Fabcom Ltd caters to include luggage, medical arch support, chairs, shoes, and apparel. The company essentially specializes in woven fabrics, knitted fabrics, coated fabrics, and 100% polyester. Shree Karni Fabcom Ltd  also manufactures specialized technical textiles. The company has installed capacity of 70,000 meters/day for weaving, 90,000 kilos/month for knitting, 50,000 meters/day for coatings, and so on. The company sells its products to various contract manufacturers of branded luggage and shoe manufacturers, traders, and others located in 13 states. It is more of an institutional market that the company caters to. Shree Karni Fabcom Ltd employs 39 employees on its rolls.

Key terms of the Shree Karni Fabcom IPO (SME)

Here are some of the highlights of the Shree Karni Fabcom IPO on the SME segment of the National Stock Exchange (NSE).

• The issue opens for subscription on 06th March 2024 and closes for subscription on 11th March 2024; both days inclusive.
   
• The stock of the company has a face value of ₹10 per share and it is a book building issue. The price for the book building issue is set in the price band of ₹220 to ₹227 per share. Being a book built issue, the price will be discovered in the above band.
   
• The IPO of Shree Karni Fabcom 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.
   
• As part of the fresh issue portion of the Shree Karni Fabcom IPO will issue a total of 18,72,000 shares (18.72 lakh shares), which at the upper band of IPO price of ₹227 per share aggregates to fresh fund raising of ₹42.49 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 18,72,000 shares (18.72 lakh shares) which at the upper band IPO price of ₹227 per share will aggregate to overall IPO size of ₹42.49 crore.
   
• Like every SME IPO, this issue also has a market making portion with a market maker inventory allocation of 93,600 shares. MLB Stock Broking Private 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 Manoj Kumar Karnani, Radhe Shyam Daga, Rajiv Lakhotia and Raj Kumar Agarwal. The promoter holding in the company currently stands at 96.16%. However, post the fresh issue of shares in the IPO, the promoter equity holding share will get diluted to 70.07%.
   
• The fresh issue funds will be used by the company funding the capex at its dyeing unit in Navsari in Gujarat. It will also fund the purchase of new machinery to be installed for manufacturing bags, at its unit in Surat. In addition, some part of the funds will also be allocated towards working capital needs and for general corporate purposes.
   
• Horizon Management Private Ltd will be the lead manager to the issue, and MAS Services Ltd will be the registrar to the issue. The market maker for the issue is MLB Stock Broking Private Ltd.

IPO allocation and minimum lot size for investment

Shree Karni Fabcom IPO has already announced the market maker allocation at 93,600 shares as inventory for market making. MLB Stock Broking Private Ltd will be the market maker for the IPO. The net offer (net of market maker allocation) will be divided between the retail investors, the QIB investors and the HNI / NII investors. The breakdown of the overall IPO of Shree Karni Fabcom Ltd in terms of the allocation to various categories are captured in the table below.

The minimum lot size for the IPO investment will be 600 shares. Thus, retail investors can invest a minimum of ₹136,200 (600 x ₹227 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 1,200 shares and having a minimum lot value of ₹272,400. 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 Shree Karni Fabcom IPO (SME)

Shree Karni Fabcom IPO opens on Wednesday, 06th March 2024 and closes on Monday, 11th March 2024. The Shree Karni Fabcom IPO bid date is from 06th March 2024 at 10.00 AM to 11th March 2024 at 5.00 PM. The Cut-off time for UPI Mandate confirmation is 5 PM on the issue closing day; which is 11th March 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 March 13th 2024, will be visible to investors under the ISIN Code – (INE0S4Y01010).

Financial highlights of Shree Karni Fabcom Ltd

The table below captures the key financials of Shree Karni Fabcom 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 hence the latest year revenue data shows a secular growth trend, which is a positive signal. The latest year revenues for FY23 is nearly 4 times that of FY21.
   
• However, profits have remained static and on an expanded equity base, that has hit the EPS very sharply. It remains to be seen if the company get back quickly to its higher EPS plane as that would be essential to be able to justify the rather rich P/E ratios. However, despite the volatility, the ROE continues to be robust at 21.34%
   
• The asset turnover ratio or the sweating ratio has been above 1.20 and that is a good sign that sales have picked up to cover the asset outlays. With scale, the impact should be visible on profits too. However, with ROA attractive, lower sweating may still be sustainable.

The company has latest year EPS of ₹11.10 and weighted average EPS of ₹25.27 for the last 3 years. Based on the latest year EPS, the IPO price upper band of ₹227 gets priced at a P/E ratio of 20-21 times which is rather high for the industry. However, should you consider the weighted average EPS, then the P/E would be closer to the range of 8-9 times P/E ratio, which is a lot more palatable. Any investor investing in the IOP must convince themselves that the EPS can bounce back in the coming years to higher levels. Otherwise, valuations may be an issue for the IPO.