What you must know Shanthala FMCG Products IPO?

Shanthala FMCG Products Ltd was incorporated in 1996 and the company is engaged in the distribution of FMCG products like branded packaged foods, personal care products, education, and stationery products, to some of the leading FMCG companies in India. (Its endeavour has been to provide quality products at a reasonable price; coupled with on-time delivery. In the year 2007, Shanthala FMCG Products Ltd became an authorized distributor for ITC Ltd. The company brings to the table some unique strengths like existing client base of large FMCG companies, a wide array of products for distribution, long term relationships with institutional and corporate customers, combined with an experienced management team with strong domain skills and long man years of accumulated insights in the business.

ITC and Sunpure are the major brands that the company distributes with ITC being its mainstay client. It has over 27 years of experience in the business, it markets over 450 products and coves more than 750 retailers as part of the value chain. The company has been a profitable company, although working capital management remains a challenge in this business.

Key terms of the SME IPO of Shanthala FMCG Products Ltd

Here are some of the highlights of the Shanthala FMCG Products Ltd IPO on the SME segment of the National Stock Exchange (NSE).

• The issue opens for subscription on 27th October 2023 and closes for subscription on 31st October 2023; both days inclusive.
   
• The company has a face value of ₹10 per share and it is a fixed price issue. The issue price for the fresh issue IPO has been fixed at ₹91 per share. Being a fixed price issue, there is no question of price discovery in this IPO.
   
• The IPO of Shanthala FMCG Products Ltd has only a fresh issue component with no book built 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 portion of the IPO, Shanthala FMCG Products Ltd will issue a total of 17,66,400 shares (17.66 lakhs approximately), which at the fixed IPO price of ₹91 per share aggregates to a total fresh fund raising of ₹16.07 crore.
   
• Since there is no offer for sale portion, the total size of the fresh issue will also be the total size of the IPO. Hence the total IPO size will also comprise of 17,66,400 shares, which at the fixed IPO price of ₹91 per share will aggregate to ₹16.07 crore.
   
• Like every SME IPO, this issue also has a market making portion with a market maker portion allocation of 88,800 shares. The market maker for the issue is BHH Securities Ltd and they will provide two-way quotes to ensure liquidity on the counter post listing and low basis costs.
   
• The company has been promoted by Manjunath Mallya, Shobitha Malya, Sneha Vinayak Kudva, and Yogish Mallya. The promoter holding in the company currently stands at 77.44%. However, post the fresh issue of shares and the OFS, the promoter equity holding share will reduce to 57.02%.
   
• The fresh issue funds will be used by the company for meeting its working capital funding gaps and for general corporate expenses. Part of the monies raised will also go towards meeting the expenses of the issue.       
   
• First Overseas Capital 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 BHH Securities Ltd.

IPO allocation and minimum lot size for investment

The company has allocated 5.03% of the issue size for the market makers to the issue, BHH Securities Ltd. The net offer (net of market maker allocation) will be divided equally between the retail investors and the non-retail investors, comprising predominantly of the HNI / NII investors. The breakdown of the overall IPO of Shanthala FMCG Products 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 1,200 shares. Thus, retail investors can invest a minimum of ₹109,200 (1,200 x ₹91 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 2,400 shares and having a minimum lot value of ₹218,400. 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 Shanthala FMCG Products Ltd IPO (SME)

The SME IPO of Shanthala FMCG Products Ltd IPO opens on Friday, October 27th, 2023 and closes on Tuesday, October 31st, 2023. The Shanthala FMCG Products Ltd IPO bid date is from October 27th, 2023 10.00 AM to October 31st, 2023 5.00 PM. The Cut-off time for UPI Mandate confirmation is 5 PM on the issue closing day; which is October 31st, 2023.

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.

Financial highlights of Shanthala FMCG Products Ltd

The table below captures the key financials of Shanthala FMCG Products Ltd for the last 3 completed financial years.

Data Source: Company RHP filed with SEBI

Here are some of the key takeaways from the financials of the company for the last 3 years.

• The revenues have been quite erratic and the revenue dependence on a single customer is also too high. That makes the business model of the company intrinsically risky. Investors have to be cautious about this aspect in the business model..
   
• The net margins have been consistently under 0.5% on an average. While this segment has low margins, these are just low margins and may not be able to justify the P/E that the company is expecting. ROE is also low and also erratic on an average.
   
• Being a capital light business, the asset turnover ratio or the asset sweating ratio has been above 5 on a consistent basis. This may not be too representative as here the expenses ratio would matter more than the asset turnover ratio.

The company has latest year EPS of ₹3.55 and the resultant P/E valuations are around 26 times earnings. These valuations are normal in FMCG companies, but Shanthala FMCG Products Ltd is a supplier and not an FMCG player. Also, with such low margins and ROE, it may be hard to defence these kind of valuations. Investors can take a long term view but have to be cautious about the low margins and the steep valuations.