Strong fundamentals versus weak market condition – a testing time for the new merchant banker! .

OFFER AT A GLANCE
Name	Cospower Engineering Ltd
Offer Amount	Rs 2.04 cr
Offer Quantity	4 lakh shares of Rs 10 each
Offer on Total Equity	26.67%
Post-issue Promoter stake	73.33%
Post-IPO Capital	Rs 1.50 cr
Offer Price	Rs 51
Minimum Application Qty	2000
Offer Opens	March 17, 2020
Offer Closes	March 19, 2020
Basis Allotment	March 24, 2020
Refund	March 26, 2020
Demat Credit	March 27, 2020
Trading	March 30, 2020
Listing	SME Platform of BSE
Rating	Nil
Lead Manager	Shreni Shares
Market Maker	Shreni Shares
Underwriter	Shreni Shares (15%), Altina Sec (85%)
Registrar	Big Share Services

 

The Offer

The present offer is an initial public issue of 4,00,000 equity shares of face value of Rs 10 at a price of Rs 51 a piece aggregating to Rs 204 lakh from the Mumbai-based nine and a half years old power capacitor/components manufacturer namely, Cospower Engineering Ltd (CEL). Of the public offer, 24,000 shares (Rs 12.24 lakh) are reserved for the Market Maker. The public float constitutes 26.67% of the company’s post-IPO paid up equity share capital (Rs 1.50 cr). The promoters’ stake in the enlarged capital would be 73.33%.

This fixed price offer is proposed to be listed on the SME platform of BSE. Investors should apply for a minimum quantity of 2000 shares (Rs 1,02,000). The issue manager, Shreni Shares, who is also acting as a Market Maker, has underwritten to an extent of only 15% (Rs 30.60 lakh) of the issue amount while Altina Securities has underwritten as much as 85% (Rs 173.40 lakh). According to the offer document, the shares are scheduled to be traded on BSE-SME from March 30, 2020.

 

Issue Object 

Of the IPO proceeds as much as Rs 48.50 lakh (23.8%) is budgeted for issue related expenses. Working capital accounts for Rs 117.50 lakh (57.6%) and the balance (Rs 38 lakh or 18.6%) is kept for general corporate purpose.

 

Business & Background 

CEL was reportedly incorporated in September 2010 in order to acquire the partnership business of M/s. Cospower Corporation, which had been in existence since 2004. Cospower Corporation was engaged in the business of trading and marketing of electric goods. CEL’s promoters Oswald D’Souza (57) and Felix Kadam (43) were the partners of the partnership firm. CEL took over the running business of Cospower Corporation along with its assets and liabilities vide agreement of takeover dated December 01, 2010.

CEL is currently said to be in the business of manufacturing of electrical panels, harmonic filters, substation and equipment mounting structure. The company also provides turnkey services involving supply, installation, commissioning, testing and comprehensive maintenance of electric products. In other words, CEL offers ‘under one roof’ a complete package of electrical system and solutions. The company claims to undertake manufacture and supply of finished products and intermediate-stage products for its customers on contract basis depending upon the demand. The promoters of CEL, Oswald D’Souza and Felix Kadam, have an experience of more than 2 decades each in electrical and engineering industry.

 

Financial Performance

The near decade-old CEL has a fairly decent track record on the financial front. No wonder, one of the elite private banks, Kotak Mahindra Bank, has extended liberal credit facility. During the last four years, though the company has had a fluctuating performance, the financials are quite impressive as compared to the company’s tiny equity base.

From Rs 9.12 cr in FY17, the company’s operating revenue declined to Rs 8.58 cr in FY18 and recouped to Rs 13.01 cr in FY19. For the first 9 months of FY20 revenue amounted to 7.43 cr. On the profit front, from Rs 30 lakh in FY2017, the bottom line slipped to Rs 19 lakh in FY18 but rose to around Rs 52 lakh in FY19. Nevertheless, in the first 9 months of the net profit amounted to only Rs 31 lakh.

Until March 2019, the company’s equity capital was only Rs 15 lakh compared to which the profits looked very attractive. In December 2019 the company issued bonus shares in a whopping ratio of 17:3 which enlarged the equity capital to Rs 100 lakh. Further, in February this year 1 lakh shares were issued at a premium of Rs 117 a piece (total share premium being Rs 117 lakh) which enhanced the capital to Rs 110 lakh. Post-IPO, this will stand increased to Rs 1.5 cr.

COSPOWER ENGINEERING FINANCIAL TRACK RECORD (Rs Lakh)
PERIOD ENDED	Dec-19	Mar-19	Mar-18	Mar-17
MONTHS	9	12	12	12
OPERATING REVENUE	743.40	1301.08	857.79	912.33
OTHER INCOME	5.48	2.18	2.96	44.76
EBITDA	63.40	103.59	64.08	87.79
OPM %	7.8	7.8	7.1	4.7
INTEREST	17.08	29.01	29.38	35.67
DEPRECIATION	3.30	3.69	4.16	4.63
PRE-TAX PROFIT	43.02	70.89	30.54	47.49
NET PROFIT	31.02	51.79	19.35	30.39
EQUITY	100.00	15.00	15.00	15.00
RESERVES	83.29	143.42	91.69	72.45

 

Valuation

The near decade-old CEL is asking for a share premium of Rs 1.64 cr (Rs 41 per share) through the IPO. How does it justify? At the end of December 2019 its earned surplus amounted to Rs 83 lakh and in February 2020 it got a share premium of Rs 117 lakh by way of conversion of at a huge premium of Rs 117 per share. Thus, compared to the company’s pre-IPO reserves of Rs 2 cr, the IPO premium seems to be fully justified.

From the earnings point of view, for the last full fiscal the company posted a net profit of around Rs 52 lakh which yields an EPS of Rs 3.45 on the post-issue equity of Rs 1.5 cr. The offer price discounts the earnings less than 15 times which looks very reasonable.

 

Perception & Concern

Even though CEL claims to be a manufacturing company, its operations involve a lot of bought-out items which results in high proportionate of material costs. Obviously, its operating margin has been in single digit till date. Also, the company has generated negative cash flow from operations in two out of last four years. More over in a turbulent market condition, it is very difficult to hold the price above the IPO level.

 

Market Maker & Lead Manager

The Rs 2 cr public offer of CEL is managed by a new investment banker namely Shreni Shares who is acting as a lead manager-cum-market maker for the first time. Will the new merchant banker succeed in marketing the IPO under the present pathetic market condition?