Stovekraft Limited – Take it with a pinch of salt

STOVEKRAFT Limited is tapping the capital markets with its fresh issue of Rs 95 crore and an offer for sale of 82.5 lakh shares in a price band of Rs 384-385. The issue has opened on January 25 and closes on January 28, Thursday. The company operates under the brands Pigeon and Gilma and is a manufacturer of home and kitchen appliances which is a highly competitive business. Its listed peers include well-known brands like TTK Prestige, Hawkins Cookers and Butterfly Gandhimathi Appliances.

During the period 2014 to 2018, the company reported revenues which were almost flat and were at Rs 510 crore, 504 crore, 523 crore, 515 crore and 529 crore. The net loss in the same period was Rs 30.4 crore, Rs 12.25 crore, Rs 43.9 crore, Rs 19.24 crore and Rs 12.76 crore. In 2019, the company saw a growth in revenue to Rs 640.9 crore and reported profits of Rs 0.91 crore. In FY 20 the revenue improved further to Rs 672.9 crore, but the profit went up substantially to Rs 2.91 crore. In the period of lockdown, the company in the six months ended September 2020 reported revenues of Rs 328.83 crore and a net profit of Rs 30.08 crore. Quite a remarkable turnaround! Not sure whether this has anything to do with the current IPO or it was just because of the initial boost from selling pulse oximeters which were imported from China after the onset of Covid-19. It is quite difficult to comprehend that in this period customers purchased home appliances and did not spend money and time when working from home in buying medicines, food and essential commodities.

If one looks at the competitors' performance in the first half of FY20-21, all three competitors reported a drop in sales in the first quarter April to June 2020 while sales were back to normal or slightly better in the quarter July to September 2020. When one compares the performance of Stovekraft, what is surprising is the fact that while revenues at Rs 328.83 crore may be justified, net profit at Rs 30.08 crore looks astonishing. With hardly any capacity utilisation improving, a highly competitive business it is difficult to imagine such an exponential growth in net margins.

The selling PE Investor Sequoia is with the company for about ten years and has been attempting to exit this investment for the last three years. The attempt failed in 2018. The company had again filed a DRHP in February 2020. The EPS reported by the company for the year ended March 2020 was Rs 1.05. Based on this EPS, the PE multiple is a staggering 366.67 times. Two of the large listed peers, TTK Prestige and Hawkins Cookers trade at a PE multiple of 44.93 and 42.25 times respectively.

Shares for Sequoia who was issued Compulsory convertible debentures were converted at Rs 71.58 and Rs 219.21 on January 18, 2021. The NAV of the company as on September 30, 2020 is Rs 51.89 and would increase to Rs 77.14 after the offer. This implies that the company is asking post offer, a valuation of 5 times its book value and roughly 1.8 times sales. With an unimpressive track record, these numbers are certainly not inspiring.

The issue for retail investors is for 10 per cent of the IPO size as the company is loss making. It requires 28,200 forms to be subscribed one time in retail. Looking at the investor base in retail which has in recent times seen subscriptions of between 20 lakh to 30 lakh applications, this issue would be subscribed as well. On being successful in getting shares allotted, it would be prudent to sell on day one itself.

(The author is the founder of Kejriwal Research and Investment Services, an advisory firm)