What you must know about Magenta Lifecare IPO?

About Magenta Lifecare Ltd

Magenta Lifecare Ltd was incorporated in the year 2015 to manufacture mattresses and pillows. The company offers a complete range of foam-based products under the brand "Magenta" in India. The product range of Magenta Lifecare Ltd includes memory foam, latex-based foam, bonded mattresses, pocketed spring mattresses, memory foam pillows, moulded memory foam pillows, moulded contour foam pillows and a lot more. The focus of the company has been on utility and comfort. Magenta Lifecare Ltd has a manufacturing facility located in Gujarat with an installed capacity of 60,000 mattresses and 70,000 pillows. The company largely retails through its dealer network as well as through institutional sales network catering to hotels, service apartments etc. The company employs 41 persons on its rolls. Magenta Lifecare Ltd currently enjoys a pan-India presence as well as a pan-India distribution network to cater to retail and the institutional segment. Most of its institutional clients have seen long standing relationship gains over time.

Highlights of the Magenta Lifecare IPO

Here are some of the highlights of the Magenta Lifecare IPO on the SME segment of the Bombay Stock Exchange (BSE). 

•    The issue opens for subscription on 05th June 2024 and closes for subscription on 07th June 2024; both days inclusive.

•    The stock of Magenta Lifecare Ltd 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 ₹35 per share. Being a fixed price issue, the question of price discovery does not arise. 

•    The IPO of Magenta Lifecare Ltd has only a fresh issue component and no offer for sale (OFS) portion. While 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, Magenta Lifecare Ltd will issue a total of 20,00,000 shares (20.00 lakh shares), which at the fixed IPO price of ₹35 per share aggregates to fresh fund raising of ₹7.00 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 20,00,000 shares (20.00 lakh shares) which at the fixed IPO price of ₹35 per share will aggregate to overall IPO size of ₹7.00 crore.

•    Like every SME IPO, this issue also has a market making portion with a market maker inventory allocation of 1,04,000 shares. Sunflower Broking Private 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 Divyesh Modi and Khyati Modi. The promoter holding in the company currently stands at 84.06%. However, post the fresh issue of shares in the IPO, the promoter equity holding share will get diluted to 59.59%.

•    The fresh issue funds will be used by the company towards mainly funding the working capital gaps in the regular operations of the company. Part of the funds will also be used for general corporate purposes. 

•    Fedex Securities Private Ltd will be the lead manager to the issue, and Cameo Corporate Services Ltd will be the registrar to the issue. The market maker for the issue is Sunflower Broking Private Ltd.

The IPO of Magenta Lifecare Ltd will be listed on the SME IPO segment of the BSE.

Magenta Lifecare IPO: Key Dates

Magenta Lifecare IPO opens on Wednesday, 05th June 2024 and closes on Friday, 07th June 2024. The Magenta Lifecare Ltd IPO bid date is from 05th June 2024 at 10.00 AM to 07th June 2024 at 5.00 PM. The Cut-off time for UPI Mandate confirmation is 5 PM on the issue closing day; which is 07th June 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 June 11th 2024, will be visible to investors under the ISIN Code – (INE0QZ901011). This allocation to the demat account is only applicable to the extent of the allocation of shares and if no allocations are made in the IPO, then no credit would be visible in the demat account.

IPO Allocation and minimum investment lot size

Magenta Lifecare Ltd has already announced the market maker allocation at 1,04,000 shares as inventory for market making. Sunflower Broking Private Ltd will be the market maker for the IPO. The breakdown of the overall IPO of Magenta Lifecare Ltd in terms of allocation to various categories are captured in the table below.

The minimum lot size for the IPO investment will be 4,000 shares. Thus, retail investors can invest a minimum of ₹1,40,000 (4,000 x ₹35 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 8,000 shares and having a minimum lot value of ₹2,80,000. 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.

Financial highlights: Magenta Lifecare Ltd

The table below captures the key financials of Magenta Lifecare Ltd for the last 3 completed financial years. 

Data Source: Company DRHP filed with SEBI

The sales in the last 3 years have been steady, with marginal degrowth each year. With the net profits being small, even the PAT margins are in the range of 2-3% consistently for the last 3 years. This is much lower than the margins that companies in the industry enjoy. In the latest fiscal year FY23, ROE stood at 4.71% and the ROA at 1.96% with both being below par. The ROE has been falling consistently over the last 3 years. The sweating ratio, as calculated by the asset turnover ratio, is tepid at 0.72X. Overall, there are very few signals of the company demonstrating any ability to grow profits in the coming years. That could be an area of concern for investors in the IPO.

The company has latest year EPS of ₹0.53 and we have not included the weighted  average EPS, since the previous year data is almost at par. The latest year earnings are being discounted by the IPO price of ₹35 per share at 66-67 times P/E ratio. Even if one looks at the 9-months EPS for FY24 at ₹0.50, it translates into full year extrapolated EPS of ₹0.67 per share. That is not going to make any substantive difference to the valuations, with the P/E ratio still at around 52-53 times FY24 earnings. Investors in the IPO have to remember two things. The overall margins of the company on a net basis is much lower than the industry average. Secondly, the P/E ratio at over 60X is hard to justify with such tepid ROE at just above 4% and consistently falling. Investors would do better to be cautious about this stock. The stock may have a tough time living up to expectations and the triggers for valuation upgrade are just not visible. Caution is the watchword for the investors in the IPO.