What you must know about Deem Roll Tech IPO?

Deem Roll Tech Ltd was incorporated in the year 2003 to manufacture steel and alloy rolls. Currently, these steel and alloy rolls are exported to over 10 countries, including the US, Germany, Europe, Oman, Saudi Arabia, South Africa, Nepal, and Bangladesh. In addition, Deem Roll Tech Ltd also caters to more than 340 domestic customers. It has over 30 export customers spread across key geographies in Europe, the US, Middle East, and Asia. The manufacturing operations of Deem Roll Tech Ltd is distributed across 3 manufacturing plants. Two of these plants are located in Mehsana and Ahmedabad in the state of Gujarat. One plant is located in Hooghly in West Bengal. Deem Roll Tech Ltd offers end to end manufacturing solutions encompassing the entire value chain including engineering & design, mould making, melting, casting, machining, and dispatch. The company also does it quality test and lab testing in-house to maintain control over quality.

The company manufactures more than 7 kinds of steel and alloy rolls. The company currently employs 275 employees on its rolls and its revenues have grown at a compounded annual growth rate (CAGR) of 27.3% over the last 3 years. The company has manufacturing capacity of 8,000 tonnes per annum (TPA) manufactured in 36,000 square metres (SQM) of factory area. Some of its key clients include McDonald Steel Corporation, KOTETSU, Jesco, Kalyani Steels, Tata Steel, Mahindra Sanyo, and JSW Steel among others. At Deem Roll Tech Ltd, the manufacturing process starts with the melting phase and then moves on to the casting phase, using the centrifugally cast process. Then comes the heat treatment phase followed by the precision machining phase. The steel and alloy rolls manufactured by Deem Roll Tech Ltd constitute the building blocks of the iron and steel rolling mill industry.

Key terms of the Deem Roll Tech IPO (SME)

Here are some of the highlights of the Deem Roll Tech IPO on the SME segment of the National Stock Exchange (NSE).

• The issue opens for subscription on 20th February 2024 and closes for subscription on 22nd February 2024; both days inclusive.
   
• The stock of the company has a face value of ₹10 per share and it is a fixed price issue. The price for the book building issue is set at ₹129 per share. Being a fixed price issue, there is no question of price discovery involved in the process.
   
• The IPO of Deem Roll Tech 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 and  hence it is not EPS or equity dilutive.
   
• As part of the fresh issue portion of the IPO, Deem Roll Tech Ltd will issue a total of 22,68,000 shares (22.68 lakh shares), which at the fixed IPO price of ₹129 per share aggregates to fresh fund raising of ₹29.26 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 22,68,000 shares (22.68 lakh shares) which at the fixed IPO price of ₹129 per share will aggregate to overall IPO size of ₹29.26 crore.
   
• Like every SME IPO, this issue also has a market making portion with a market maker inventory allocation of 1,14,000 shares. SS Corporate Securities 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 Jyoti Prasad Bhattacharya and Dev Jyoti Prasad Bhattacharya. The promoter holding in the company currently stands at 92.18%. However, post the fresh issue of shares in the IPO, the promoter equity holding share will get diluted to 67.12%.
   
• The fresh issue funds will be used by the company for funding the capital expenditure of the existing manufacturing facility at Mehsana, Gujarat, and for funding the working capital gaps. Part of the funds raised will also go towards general corporate expenses.
   
• Fedex Securities Private Ltd will be the lead manager to the issue, and Bigshare Services Private Ltd will be the registrar to the issue. The market maker for the issue is SS Corporate Securities Ltd.

IPO allocation and minimum lot size for investment

Deem Roll Tech Ltd has already announced the market maker allocation at 1,14,000 shares as inventory for market making. SS Corporate Services Ltd will be the market maker for the IPO. The net offer (net of market maker allocation) will be divided between the retail investors and the HNI / NII investors. The breakdown of the overall IPO of Deem Roll Tech 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 1,000 shares. Thus, retail investors can invest a minimum of ₹129,000 (1,000 x ₹129 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 2,000 shares and having a minimum lot value of ₹258,000. 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.

Key dates to be aware of in the Deem Roll Tech IPO (SME)

The SME IPO of Deem Roll Tech IPO opens on Tuesday, 20th February 2024 and closes on Thursday, 22nd February 2024. The Deem Roll Tech IPO bid date is from 20th February 2024 at 10.00 AM to 22nd February 2024 at 5.00 PM. The Cut-off time for UPI Mandate confirmation is 5 PM on the issue closing day; which is 22nd February 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 February 27th 2024, will be visible to investors under the ISIN Code – (INE586O01011).

Financial highlights of Deem Roll Tech Ltd

The table below captures the key financials of Deem Roll Tech 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 pace in the last 2 years and hence the latest year revenue data shows a secular growth trend, which is positive. Overall growth over last two years is more than 60%. The PAT margins are relatively low, but the growth has been sharp in the latest year in PAT margins.
   
• While net margins of the company have only picked up steam in the latest year, it is more because the costs have been front-ended. However, the ROE and return on assets in the latest year are attractive and also stable at 15.52% and 7.51% respectively.
   
• The asset turnover ratio or the sweating ratio has been above 1.10X 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, the higher asset turnover ratio is not only sustainable, but also gets magnified.

The company has latest year EPS of ₹11.86 and even through previous data may not really be comparable, the weighted average EPS of last 3 years stand at ₹9.12. The latest year earnings are being discounted by the IPO price of ₹129 per share at 10-11times P/E ratio. One has to look at the P/E ratio from two standpoints. Firstly, the half year EPS for FY24 is much higher at ₹6.37, which makes the valuations look more reasonable if the EPS is annualized and extrapolated. However, the real story is that the story becomes a lot more enticing once the economies of scale start to reflect on the profit numbers. The company has some inherent advantages like a strong marketing and distribution network, a scalable business model and a diversified customer base to avoid the risk of cyclicality. The valuations do leave something on the table for investors. However, investors must be prepared for a higher level of risk and also take a longer term perspective of the investment in this IPO of Deem Roll Tech Ltd.