What you must know about United Cotfab IPO?

About United Cotfab Ltd

United Cotfab Ltd was incorporated in the year 2015 to manufacture high-quality open-end yarn for the textile industry. United Cotfab Ltd  essentially supplies its yarn products to clients including textile manufacturers, garment exporters and distributors. Its product portfolio comprises of open-end cotton yarn and cotton yarn. Consider the highly quality conscious demands of its institutional clients, United Cotfab Ltd has ensured that its manufacturing process adheres to stringent quality standards. The production process is also backed by advanced technology and machinery. United Cotfab Ltd has its manufacturing facility located at Ahmedabad in Gujarat, which was once called the Manchester of India for its thriving textile industry. The Manufacturing facility of United Cotfab Ltd has an installed capacity of nearly 9125 metric tonnes per annum (MTPA). The company employs about 118 personnel on its rolls. Some of the marquee clients of United Cotfab Ltd include Aarvee Denims, JRD Denims, Jindal Group, E-Land Apparel, Partap group etc. The promoters have a combined experience of over 55 years in the textiles business.

Highlights of the United Cotfab Ltd (BSE SME IPO)

Here are some of the highlights of the United Cotfab Ltd IPO on the SME segment of the Bombay Stock Exchange (BSE). 

• The issue opens for subscription on 13th June 2024 and closes for subscription on 19th June 2024; both days inclusive.
• The stock of United Cotfab Ltd has a face value of ₹10 per share and it is a fixed price issue. The price for the fixed price issue is set at ₹70 per share. Being a fixed price issue, the question of price discovery does not arise. 
• The United Cotfab IPO has only a fresh issue component with no offer for sale (OFS) component in the . While the fresh issue portion is EPS dilutive and equity dilutive, OFS is just a transfer of ownership and  hence not EPS or equity dilutive.
• As part of the fresh issue portion of the IPO, United Cotfab Ltd will issue a total of 51,84,000 shares (51.84 lakh shares), which at the fixed IPO price of ₹70 per share aggregates to fresh fund raising of ₹36.29 crore.
• Since there is no offer for sale, the fresh issue portion will also double up as the overall issue size. As a result, the overall IPO size will also comprise of the issue of 51,84,000 shares (51.84 lakh shares) which at the fixed IPO price of ₹70 per share will aggregate to overall IPO size of ₹36.29 crore.
• Like every SME IPO, this issue also has a market making portion with a market maker inventory allocation of 2,60,000 shares. Spread X Securities 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 Nirmalkumar Mangalchand Mittal and Gagan Nirmalkumar Mittal. 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 69.84%.
• The fresh issue funds will be used by the company towards funding the working capital gaps in the regular operations of the company. Part of the funds will also be used for general corporate purposes. 
• Beeline Capital Advisors Private Ltd will be the lead manager to the issue, and Purva Share Registry India Private Ltd will be the registrar to the issue. The market maker for the issue is Spread X Securities Private Ltd.

The IPO of United Cotfab Ltd will be listed on the SME IPO segment of the BSE.

Key dates for United Cotfab Ltd IPO

The BSE SME IPO of United Cotfab Ltd IPO opens on Thursday, 13th June 2024 and closes on Wednesday, 19th June 2024. The United Cotfab Ltd IPO bid date is from 13th June 2024 at 10.00 AM to 19th June 2024 at 5.00 PM. The Cut-off time for UPI Mandate confirmation is 5 PM on the issue closing day; which is 19th June 2024.

Data Source: Company RHP

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 June 21st 2024, will be visible to investors under the ISIN Code – (INE0S0I01011). This allocation to the demat account is only applicable to the extent of the allocation of shares and if no allocations are made in the IPO, then no credit would be visible in the demat account.

IPO allocation and minimum investment lot size

United Cotfab Ltd has already announced the market maker allocation at 2,60,000 shares as inventory for market making. Spread X Securities Private Ltd will be the market maker for the IPO. The breakdown of the overall IPO of United Cotfab Ltd in terms of allocation to various categories are captured in the table below.

Data Source: Company RHP

It may be noted here that the Net Offer above refers to the quantity net of employee and promoter quota, as indicated above. There is no employee quota that has been communicated by the company as the shares reserved for employees in its red herring prospectus (RHP). The anchor portion, will be carved out of the QIB portion and the QIB portion available to the public will be reduced proportionately.

Lot sizes for investing in the IPO of Le Travenues Technology Ltd (Ixigo)

The minimum lot size for the IPO investment will be 2,000 shares. Thus, retail investors can invest a minimum of ₹1,40,000 (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 ₹2,80,000. 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.

There is no maximum size limit for HNI applicants in an SME IPO. Let us now turn to the financial highlights of the IPO of United Cotfab Ltd. The company has already reported latest numbers up to the close of fiscal year 2023-24 i.e., up to March 31, 2024.

Financial highlights of United Cotfab Ltd

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

Data Source: Company RHP filed with SEBI (FY refers to Apr-Mar period)

The sales growth in the last 3 years is not too relevant since it had hardly any sales revenues till FY23 and has only seen substantial revenues in the year FY24. Due to the low base, the growth figures may be overstated and have to be taken with caution. With the net profits being small, the PAT margins are at around 17.52% in the latest year, with previous year data not too relevant int his case.. For FY24, the ROE stood at 62.41% and the ROA at 10.61% with both being above average for the industry. However, the data is not really comparable for previous periods. The sweating ratio, as calculated by the asset turnover ratio, is robust at 1.41X in the latest year. Overall, while the net margins are below par, the asset turnover is strong and the ROA is quite robust. However, we only have one year of relevant data to back up and hence data shortfalls may be a challenge for taking a decision on investing in the IPO.

The company has latest year EPS of ₹7.97 and we have not included the weighted  average EPS, since the previous year data is not comparable due to the structure change. The latest year earnings are being discounted by the IPO price of ₹70 per share at 8-9 times P/E ratio, which is fairly reasonable. In the absence of FY24 numbers already been declared, there is not extrapolation that investors need to do here, as the data is already current. Investors in the IPO have to remember two things. There is only one year of full business data and that may not be sufficient to take an investment call for the investors. Secondly, the company does have a scalable business model and experienced promoters; although the paucity of financial data may still be a challenge. Investors with a higher risk appetite levels can look to participate in the IPO, but they may have a longer wait as valuations will depend on quarterly earnings traction That is not visible for now. Any buying call in the IPO must be taken up with caution largely due to the paucity of adequate history of data.