Will the son-in-law do better than his father-in-law?

In-laws’ company Glittek Granites gave its consent in May 2022 for being disclosed as a group company in the offer document but, the consent was revoked by Glittek in February 2023!

GLOBAL SURFACES OFFER AT A GLANCE
Offer Type	Book Built
Platform	Main Frame
Offer Size	1,10,70,000 equity shares (Rs 154.98 Cr)
Fresh Issue	85,20,000 equity shares (Rs 119.28 Cr)
Offer for Sale	25,50,000 equity shares (Rs35.70 Cr)
Face Value	Rs 10
Price Band	Rs 133 – 140
Mkt/Bid Lot	100 Nos.
Implied M-Cap	Rs 593 Cr
Implied Equity Cap	Rs 42.38 Cr
Free Float	26.64 %
Lead Manager	Unistone Capital
Registrar	Bigshare Services
Listing	BSE, NSE

 

INDICATIVE ISSUE SCHEDULE
Opening         : 13-Mar-2023	Closing       : 15-Mar-2023
Allotment       : 20-Mar-2023	Refunding : 21-Mar-2023
DematCredit : 22-Mar-2023	Trading      : 23-Mar-2023

The Offer

The Jaipur-based Global Surfaces Ltd (GSL) is coming out with an IPO of Rs 154.98 Cr.  The offer is comprised of a fresh issue of 85.2 lakh equity shares (Rs 119.28 Cr) and an offer for sale of 25.5 lakh equity shares (Rs 35.70 Cr) from the promoter and his spouse. The offer is being made through the book-building route with a price band of Rs 133-140 for Rs 10 paid-up share.

Applicants for the IPO should bid for a minimum lot of 100 shares and multiples thereof. The shares are proposed to be listed on the main frame of BSE & NSE on Thursday, March23, 2022. Unistone Capital is managing the offer and Bigshare Services is the registrar to the issue. The bidding opens on Monday, March 13 and closes on Wednesday, March 15, 2023.

The company proposes to utilize the net proceeds of the fresh issue to the tune of Rs 90 Cr towards investment in its wholly owned subsidiary, Global Surfaces FZE for part-financing its capital expenditure requirements (Rs 151 Cr) in connection with the setting up of manufacturing facility for engineered quartz at The Jebel Ali Free Zone, Dubai, United Arab Emirates. The balance amount net of issue expenses is earmarked for general corporate purposes. However, the funding plan has not been appraised by any bank or financial institution.

Lineage

GSL’s fundamentals are indeed quite impressive. It has grown from a single category to multi-category stone manufacturing company. Revenue has grown at a CAGR of more than 21% in last 11 years. From Rs 23 Cr in fiscal 2011, revenue reached Rs 50 Cr in 2016. The next Rs 50 Cr was added in three years. In the current fiscal the company is poised to reach the Rs 200 Cr-mark. The company’s profitability too has been very attractive since last four years. Do all these justify investment in GSL’s IPO? Well, the track record of the promoters’ group company certainly merits attention.

During the unprecedented primary market boom in 1994, Bimal Kumar Agarwala (father-in-law of GSL’s main promoter Mayank Shah) along with his brothers floated Glittek Granites Ltd. The issue highlights of GGL read as follows: “A 100% Export Oriented Unit for manufacture of polished Granite Tiles and Slabs; Project appraised ICICI; Financial participation by ICICI and IDBI; Granite processing technical know-how and plant and machinery supplied by EISENWERK HENSEL BAYREUTH, Germany; Ready & growing market worldwide; MOU with overseas buyer for export of 60% of annual production; Export Marketing Assistance Agreement with MMTC Ltd;” etc, etc.

Twenty-nine years have passed since GGL went public. What has GGL achieved? When GSL has done exceedingly well in last four years, GGL, which is also operating in related line of business, has put up pathetic performances. Its revenue has continuously receded from over Rs 25 Cr in fiscal 2017 to Rs 9 in fiscal 2022. The company has been posting losses since fiscal 2019.

As a matter of fact, during the late 90’s as the accumulated losses exceeded twice its capital, GGL which was once patronized by ICICI and IDBI became a sick accompany and was referred to BIFR! Consequently, under the rehabilitation scheme, the paid-up value of share was reduced 50%, from Rs 10 to Rs 5. Fresh capital was infused but, the stock never yielded any return. Like the late 90’s the company’s losses are once again mounting up and the stock is currently traded almost 70% discount to the IPO price.

Glittek Granites  Financial Performance (in Lakh)
Period Ended	Dec-22	Mar-22	Mar-21	Mar-20	Mar-19	Mar-18	Mar-17
Months	9	12	12	12	12	12	12
Revenue	751	917	1435	1798	2101	2357	2560
Operating Profit	0	-35	-197	62	76	198	191
OPM%	0	-3.8	-13.7	3.4	3.6	8.4	7.4
Other Income	38	25	24	27	23	29	19
EBIDTA	38	-10	-173	89	98	227	210
EBIDTA %	4.9	-1.1	-11.8	4.9	4.6	9.5	8.1
Interest	126	128	118	167	122	94	80
Depreciation	65	94	96	96	99	100	101
Tax	0	0	-77	-37	0	7	19
Net Profit	-134	-231	-310	-138	-90	112	10
Equity  Capital	1329	1329	1329	1329	1329	1329	1329
Reserves	245	245	71	371	505	679	578
Accumulated Loss	398	398	0	0	0	0	0
Borrowing	NA	2036	1781	1779	1749	1716	1545
Fixed Assets	NA	408	514	607	703	801	908
Promoter Stake %	63.4	63.5	63.1	63.9	63.9	63.9	63.9
Start Price	4.06	1.69	0.97	1.64	2.66	1.84	2.27
Year High	5.49	5.17	2.07	1.97	3.06	4.67	3.1
Year Low	2.17	1.20	0.73	0.74	1.54	1.73	1.52
End Price	2.70	3.87	1.77	1.02	1.69	2.54	1.85

Coming to the son-in-law’s company, incorporated in 1991 as Swastic Niwas Private Ltd, GSL was initially a real estate and construction company which changed its business in the year 2004 after acquiring a natural stone quarry in Rajasthan. The company shifted its registered office from Kolkata to Jaipur in the year 2021.

GSL has two manufacturing units, one located at RIICO Industrial Area, Bagru, Jaipur, Rajasthan and the other at Mahindra World City SEZ, Jaipur. The Bagru unit was acquired by company as a stressed asset under the Recovery of the Debt Due to Banks and Financial Institutions Act and is exclusively dedicated to processing natural stones such as marble, granite and quartzite. It is located in close proximity of the key raw material, blocks of natural stones.

Since fiscal 2018 the company has further diversified its business into manufacturing of engineered quartz and for this purpose the Unit II at Mahindra World City SEZ was set up. And, now, through its wholly owned subsidiary, Global Surfaces FZE, GSL intends to establish a dedicated unit for manufacturing engineered quartz at Dubai, UAE.

Key Management

Promoter Mayank Shah (44), who holds a Bachelors’ degree in Commerce and has about 18 years’ experience in the natural and engineered stone industry, is the chairman and managing director of the company.

Promoter’s spouse Sweta Shah (46), who is also a commerce graduate, is designated as executive director. She had earlier worked as a chief executive officer of the company since September 11, 2021.

Rajesh Gattani (33) is the Chief Financial Officer of the company. He has been associated with GSL since June 7, 2018. He is an associate member of the Institute of Chartered Accountant of India and holds a bachelor’s degree in commerce. He has an overall experience of nearly 8 years in accounts and finance industry. Prior to joining GSL, he was with Surendra Gupta & Associates, Chartered Accountants as Senior Manager – Audit &Taxation.

Stakeholders

Of the pre-IPO equity capital of Rs 33.86 Cr, the promoter and his spouse holds 73.55% and 10.48% at an average cost per share of Rs 5.73 and Rs 62.87 respectively. Eight other shareholders of the promoter group hold 13.32% at a nominal cost. Post-IPO, the promoter will hold 55.46% at a cost of Rs 5.73 negative and his spouse will have 5.66% at an average cost of Rs 62.87 negative. Promoter’s associates will hold 12.24%.

At least 20% of the post-offer equity share capital will be locked-in for a period of three years and the balance 53.36% will be locked-in for one year. The entire pre-IPO holding under the public category will be locked-in for six months. Of the IPO, 50% of the shares allotted to Anchor Investors will be locked-in for a period of 90 days from the date of Allotment and the remaining 50% of the anchor investor portion will be locked-in for a period of 30 days from the date of Allotment.

Business

GSL is engaged in the business of processing natural stones and manufacturing engineered quartz. Natural stones are produced by complex geological processes and include a number of products such as granite, limestone, marble, slate, quartzite, onyx, sandstone, travertine, and others that are quarried from the earth. Engineered quartz on the other hand, is an engineered stone used in the countertop industry, which is a composite material made up of crushed stone bonded by an adhesive.

GSL’s products find application in flooring, wall cladding, countertops, cut-to size, etc. and they are used in both commercial and residential buildings. Currently, the company’s products are sold predominantly outside India. Approximately 99% of its revenues have been derived from exports during the fiscals 2020, 2021 and 2022. The company is reportedly exporting to the United States, Canada, Australia and Middle East.

By setting up the proposed facility in UAE, which is strategically located in free trade zone and near Jebel Ali port, the company intends to achieve organic growth, optimization of freight and transportation charges, customer acquisition and expansion of business. The proposed new facility is to have an installed capacity of 622,896 sq. meters of slabs and is expected to commence commercial operations by start of third quarter of fiscal 2024.

Financial Track

GSL’s growth during the last decade is commendable. From Rs 23 Cr in fiscal 2011 the company’s top line has grown to Rs 190 Cr in fiscal 2022, registering a CAGR of more than 21% in last 11 years. Even during fiscal 2021, despite COVID-19, its revenue grew by 7.4%.

Operationally, the contribution of natural stones has been declining in recent years. From Rs 55 Cr in 2020, it has decreased to Rs 11 Cr in the first half of current fiscal. On the contrary, the contribution of engineered quartz has increased from Rs 108 Cr in 2020 to Rs 157 Cr in 2022 which amounted to almost 83%. In the first half of current fiscal it was at Rs 87 Cr.

Since fiscal 2019, the company’s bottom line has been attractive as compared to its capital base. Net profit has steadily increased from Rs 1.42 Cr in fiscal 2018 to Rs 35.63 Cr in fiscal 2022. Nevertheless, the company has not paid any dividend till date. GSL proposes to increase the equity capital to Rs 42 Cr through the public issue.

Global Surfaces Consolidated Financials (in Cr)
Period Ended	Sep-22	Mar-22	Mar-21	Mar-20	Mar-19	Mar-18
Months	6	12	12	12	12	12
Revenue	97.98	190.31	175.37	163.29	136.01	72.01
Operating Profit	19.25	41.8	47.32	40.32	33.55	6.58
OPM%	19.7	22.0	27.0	24.7	24.7	9.1
Other Income	1.27	8.04	3.63	2.49	1.35	1.62
EBIDTA	20.52	49.85	50.95	42.81	34.91	8.19
EBIDTA %	20.7	25.3	28.6	25.9	25.4	11.1
Interest	1.90	2.96	3.41	5.22	5.84	2.65
Depreciation	4.38	10.78	13.01	16.86	12.02	3.4
Tax	3.22	6.48	6.11	3.69	3.32	0.82
Net Profit	13.59	35.63	33.93	20.96	13.17	1.42
Equity (Implied)	42.38	33.86	6.45	6.45	6.45	6.29
Reserves (Implied)	225.83	100.17	91.98	58.03	35.76	21.74
Borrowing	50.52	37.28	37.46	53.49	88.16	66.05
Fixed Assets	110.90	95.30	54.80	60.00	65.90	63.30

Valuation

GSL has proposed a price band of Rs 133-140 for Rs 10 paid-up share. The cap price discounts the company’s EPS by more than 16 times, EBIDTA by about 12 times and book value by 2.2 times. Even though, the company’s impressive growth in recent years may justify the IPO valuation, the poor market sentiments for the industry and the group company’s dismal track record may curtail appreciation prospects. Comparable peers like Pokarna and ARO are currently valued much lower.

How Global Surfaces compares with select peers
Financials
(Amount in Cr)	Global Surfaces	Pokarna	ARO Granite	Glittek Granites
Market Cap	593	926	65	8
Borrowing	37	510	199	20
Fixed Assets	95	759	171	4
Revenue	190	650	225	9
Other Income	8	3	1	0
EBIDTA	50	177	31	0
Interest	3	36	8	1
Net Profit	36	78	9	-2
Equity Cap	42	6	15	13
Reserves	226	437	181	2
Stock Features
Current Price (Rs)	140	299	42	3
Face Value (Rs)	10	2	10	5
Book Value	63	143	128	4
Promoter Stake %	73	57	41	63
Debt/Equity	0.1	1.2	1.0	1.7
Profitability
OPM %	22.0	26.8	13.4	-3.8
Net Margin %	18.0	12.0	3.9	-24.5
Cash EPS	10.95	37.70	14.15	-0.51
Earnings Per Share	8.41	25.25	5.82	-0.87
Return
RONW %	23.9	17.7	4.5	0
ROCE %	21.0	14.5	4.7	0
Discounting
Price/Earnings	16.7	11.8	7.3	-3.4
Price/Cash EPS	12.8	7.9	3.0	-5.7
Price/Book Value	2.2	2.1	0.3	0.7
Price/EBIDTA	11.9	5.2	2.1	-75.9
Price/Revenue	3.1	1.4	0.3	0.8
Price/Fixed Assets	6.2	1.2	0.4	1.9
Distribution
Dividend %	0	30	0	0
Yield %	0	0.2	0	0
Pay-out %	0	2.4	0	0

Concern

The company has taken a floor space on lease from promoter’s spouse Sweta Shah who is the executive director of the company. Not only has the company committed to pay a rent of Rs 1 lakh per month but it has also already incurred a sum of Rs 7.3 Cr towards construction of the premises on the leased floor for the purpose of providing residential accommodation to the company’s Key Managerial Personnel and their family members. Why should the public company incur heavy construction cost on a property which is privately owned by the promoter’s relative?