S P Apparels opens for IPO today, Is it a fair deal?

S P Apparels Ltd (SPAL), a manufacturer and exporter of knitted garments in India, has come up with an initial public offering (IPO) with an issue size of 9,00,000 equity shares aggregating up to Rs 215 crore via 100% book building.

The IPO starts from August 2, 2016 and will end on August 4,2016. The company has fixed the price band to lower band of Rs 258 and upper band of Rs 268.

It’s book running lead managers (BLRM) are Motilal Oswal Securities Limited and Centrum Broking Limited.

SP Apparels plan to utilise the fund for expansion and modernisation of its existing manufacturing plant at Valpady, Salem, Tamil Nadu, prepayment and reduction of debt and also for enhancing its “Crocodile” brand.

During its meeting held on Monday, the IPO committee of the company has decided allocation of 26,76,685 equity shares of anchor investors at an allocation price of Rsa 268 which with an focus to raise around Rs 71.7 crore. The name of anchor investors are DSP Blackrock Micro Cap fund, Goldman Sachs India fund, Birla Sun Life, Morgan Stanley and many more.

Should you subscribe it?

Dilip Davda (SEBI registered Research Analyst-Mumbai) in Free Press Journal said, "BRLMs’ have poor track record. However, considering the sops for the segment in which the company is engaged and has shown improved performances for past four fiscals, cash surplus investors may consider for medium to long term investment in this issue. "

Considering the upper price band of Rs 268 and on FY16 (financial year 2016) earnings per share(EPS) of Rs 17.15, the P/E ratios (price over equity) has been fixed at 15.6x.

Since last 3 year, the EPS was around Rs 11.08, along with P/E ratio of 24.1x.

As per Myinvestingideas.com following are the recommendations for the IPO.

Looking at the price band and P/E ratio, it would mean the company is asking the upper band of issue price of Rs 268 for a P/E ratio between 15.6x to 24.1x. If compared this with its peers Kitex Garment which are trading at P/E ratio of 20.04, suggest that SP Apparels issue price is on the higher side,

Further it added that, the company’s revenue grew just at 7.6% CAGR (compounding annual growth rate) in last 5 year. In terms of net profit, the company only managed generate profit in the range of 1% to 2%. However, that changed during FY16 where it saw 6.5% growth in net profit. The two BLRM’s have handled nealy 4 IPO’s earlier, where 3 of them have been isted below issue price of listing day.

Considering all the factors, the report does not recommend for subscription.

Also, WaytoWealth said, in spite of Rs 63 crores set aside for repayment of debt of the total debt of Rs 259.3 crores, the company still remains highly leveraged. The company has earmarked some of the money raised for expansion of the branded business Crocodile. We believe the company will be in a capex mode for the next few years & this might entail some pressure on the balance sheet. Hence, we are neutral on the issue. 

The SP Apparel IPO would be one of small issue in size among the last few IPO’s that has came into the market.