What you must know about Polysil Irrigation Systems IPO?

Polysil Irrigation Systems Ltd was incorporated in the year 1985 to manufacture and distribute value-added products like HDPE (high density polyethylene) pipes, fittings, and micro irrigation systems. This includes drip irrigation systems and sprinkler irrigation systems as well as their components and related products. All these products are marketed under the brand name of Polysil. Apart from these principal products, Polysil Irrigation Systems Ltd also makes disc filters, screen filters, hydro-cyclone filters, sand filters, valves (electrical and mechanical), fertilizer tanks, digital controllers, pressure gages, and many more. Polysil Irrigation Systems Ltd is active in the states of Gujarat, TN, Maharashtra, Andhra Pradesh, Karnataka, MP, UP, Rajasthan, and Haryana. Its customers include B2B and B2C customers and it operates through a network of 8 distributors and 425 dealers in India.

The manufacturing plant of Polysil Irrigation Systems Ltd is located in Vadodara and is spread over an area of 100,000 SQM. The company is a fully integrated player within the Drip Irrigation and Sprinkler Irrigation sectors, with significant presence in Micro Irrigation segment. Polysil Irrigation Systems Ltd has a pan-India reach and employs over 700 people across geographies. The vast footprint of the company allows Polysil Irrigation Systems Ltd to leverage business associations with marquee clients, especially with various state governments, agriculture NGOs and large corporates. The company plans to achieve top line sales of around ₹500 crore for the fiscal year FY25.

Key terms of the SME IPO of Polysil Irrigation Systems IPO

Here are some of the highlights of the Polysil Irrigation Systems IPO on the SME segment of the National Stock Exchange (NSE).

• The issue opens for subscription on 08th February 2024 and closes for subscription on 13th 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 fixed price issue is set at ₹54 per share. Being a fixed price IPO, there is no question of price discovery in this case.
   
• The IPO of Polysil Irrigation Systems Ltd has a fresh issue component and an 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, Polysil Irrigation Systems Ltd will issue a total of 14,44,000 shares (14.44 lakh shares), which at the fixed IPO price of ₹54 per share aggregates to fresh fund raising of ₹7.80 crore.
   
• The offer for sale (OFS) portion of the IPO will entail the sale of 17,85,000 shares (17.85 lakh shares), which at the fixed IPO price of ₹54 per share aggregates to an OFS size of ₹9.64 crore.
   
• The offer for sale will be offered by the non-promoter investor shareholders. The entire OFS of 17.85 lakh shares will be offered as under: Satishkumar Maniya (6.30 lakh shares), Sunil Kumar Shah (6.30 lakh shares), and Ramesh Bhai Kakadia (5.25 lakh shares).
   
• Therefore, the overall IPO size will comprise of the combined issue and sale of 32,29,000 shares (32.29 lakh shares) which at the fixed IPO price of ₹54 per share will aggregate to overall IPO size of ₹17.44 crore.
   
• Like every SME IPO, this issue also has a market making portion with a market maker inventory allocation. However, the name of the market maker and the size of the market inventory is yet to be finalized and announced. 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 Bharat Kumar Patel and Praful Radadia. The promoter holding in the company currently stands at 33.79%. However, post the fresh issue of shares in the IPO, the promoter equity holding share will get diluted to 29.49%.
   
• The fresh issue funds will be used by the company towards funding the working capital gaps and for general corporate purposes. Part of the funds raised will also be applied towards the issue related 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 yet to be announced by the company.

IPO allocation and minimum lot size for investment

Polysil Irrigation Systems IPO is yet to announce the name of the market maker and the size of the market maker inventory. Generally, companies offer a minimum of 5% of the total capital size as the market maker inventory. The net offer (net of market maker allocation) will be divided between the retail investors and the HNI / NII investors in equal proportion. The breakdown of the overall IPO of Polysil Irrigation Systems 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 2,000 shares. Thus, retail investors can invest a minimum of ₹108,000 (2,000 x ₹54 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 ₹216,000. 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 Polysil Irrigation Systems IPO (SME)

The SME IPO of Polysil Irrigation Systems Ltd IPO opens on Thursday, 08th February 2024 and closes on Tuesday, 13th February 2024. The Polysil Irrigation Systems Ltd IPO bid date is from 08th February 2024 at 10.00 AM to 13th February 2024 at 5.00 PM. The Cut-off time for UPI Mandate confirmation is 5 PM on the issue closing day; which is 13th 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 15th 2024, will be visible to investors under the ISIN Code – (INE517M01028).

Financial highlights of Polysil Irrigation Systems Ltd

The table below captures the key financials of Polysil Irrigation Systems 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 growth has been quite erratic and this can be largely attributed to the cyclicality of the demand for micro irrigation products. That risk of cyclicality is likely to continue  and even the net profit margins are still quite low.
   
• While net margins of the company have been on the lower side, the ROE at 7.4% and the ROA at 2.06% are also relatively tepid. This could make it tougher for the company to justify higher valuations.
   
• The asset turnover ratio or the sweating ratio has been persistently below 1 and that could be due to the front-ending of outlays in this business. With scale, the impact should be visible on profits too. However, higher ROA may be needed as proxy for the asset turnover ratio.

The company has latest year EPS of ₹1.15 and due to the rapid growth and the erratic historic numbers, the previous EPS may not be too relevant. The latest year earnings are being discounted by the IPO price of ₹54 by nearly 46-47 times P/E ratio. One has to look at the P/E ratio from two perspectives. Firstly, the demand for the products tends to be cyclical and that is unlikely to change in the short run. Economies of scale will take some time. However, the IPO does have some qualitative merits like a knowledgeable dealer team, technical expertise, and strong networks in the irrigation business. Investors with a higher level of risk appetite and a longer time frame can look at this IPO of Polysil Irrigation Systems Ltd from a buy and hold perspective.