What you must know about Sharp Chucks And Machines IPO?

Sharp Chucks And Machines Ltd was incorporated in 1994, and manufactures forging and graded casting machined components for tractors and other automobiles. In addition, the company also makes power chucks, lathe chucks, drill chucks, and other machine tool accessories for tractors, automobiles, material handling & earth moving equipment. It broadly caters to the automotive, railways, defence, and the industrial tools segment. Its forging products portfolio comprises of gear, dog clutch, scaffolding, wrench axe, cross pein hammer, machinist hammer, sledgehammer, combination spanner, Splitting Axe, Claw Hammer etc. The second vertical of casting products includes brake housing, piston trumpet housing, wheel hub kit, brake drum, ram cylinder, steering arm, fly wheel, temper head etc. The machine components vertical different types of chucks. The company has 2 manufacturing units in Jalandhar in Punjab, comprising of 3 foundries.

Key terms of the Sharp Chucks And Machines IPO (SME)

Here are some of the highlights of the Sharp Chucks And Machines IPO on the SME segment of the National Stock Exchange (NSE).

• The issue opens for subscription on 29th September 2023 and closes for subscription on 04th 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 has been fixed at ₹58 per share. Since it is a fixed price issue, there will be no price discovery required in this case.
   
• The IPO of Sharp Chucks And Machines Ltd has a fresh issue component and an offer for sale (OFS) component. 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, Sharp Chucks And Machines Ltd will issue a total of 9,75,484 shares (9.75 lakh shares approximately ). At the fixed IPO price of ₹58 per share, the total value of the fresh issue portion aggregates to ₹5.66 crore.
   
• As part of the offer for sale (OFS) portion of the IPO, Sharp Chucks And Machines Ltd will sell a total of 19,28,516 shares (19.29 lakh shares approximately ). At the fixed IPO price of ₹58 per share, the total value of the fresh issue portion aggregates to ₹11.19 crore. The entire OFS sale will be done by SIDBI Trustee India Opportunities Fund.
   
• Therefore, the overall IPO of Sharp Chucks And Machines Ltd will entail the issue and sale of a total of 29,04,000 shares (29.04 lakh shares). At the fixed IPO price of ₹58 per share, the total value of the overall IPO issue aggregates to ₹16.84 crore.
   
• Like every SME IPO, this issue also has a market making portion with a market maker inventory allocation of 1,48,000 shares. The market maker for the issue will be Nikunj Stock Brokers 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 Ajay Sikka and Gopika Sikka. The promoter holding in the company currently stands at 80.28%. However, post the fresh issue of shares, the promoter equity holding share will get diluted to 73.00%.
   
• The fresh issue funds will be used by the company for funding of its incremental working capital requirements as well as partially for general corporate purposes. Part of the monies will also go towards issue expenses.
   
• While Fedex Securities Private Ltd will be the lead manager to the issue, Skyline Financial Services Private Ltd will be the registrar to the issue. The market maker for the issue will be Nikunj Stock Brokers  Ltd.

IPO allocation and minimum lot size for investment

Out of the total shares on offer, the company has allocated 1,48,000 shares for the market maker for providing liquidity post listing and reducing basis risk. The net offer (net of market maker allocation) will be distributed between the retail investors and the HNI / NII investors. The table below captures the gist of the IPO allocation to various categories.

The minimum lot size for the IPO investment will be 2,000 shares. Thus, retail investors can invest a minimum of ₹1,16,000 (2,000 x ₹58 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 ₹2,32,000. 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 Sharp Chucks And Machines IPO (SME)

Sharp Chucks And Machines IPO opens on Friday, September 29th, 2023 and closes on Wednesday, October 04th, 2023. The Sharp Chucks And Machines IPO bid date is from September 29th, 2023 10.00 AM to October 04th, 2023 5.00 PM. The Cut-off time for UPI Mandate confirmation is 5 PM on the issue closing day; which is October 04th, 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 Sharp Chucks And Machines Ltd

The table below captures the key financials of Sharp Chucks And Machines Ltd for the last 3 completed financial years.

Data Source: Company DRHP filed with SEBI

The company has till date reported stable growth in sales an also in profits. The concern could be on the margins front. The company has reported net margins of 2.82% in the current year, and that is where the margins have stabilized. It may be tough to raise the net margins from here. The ROE is not too compelling at around 10% and that could be attributed to the capital intensive nature of the business. That is also reflected in the sub-1 levels asset turnover ratios.

The P/E of 11-13 may look reasonable but the big question is where the trigger for better net margins and better ROE is going to come from. The business is a low end business with a lot of competition from the organized and the unorganized segments. For investors it remains a good long term idea, but risky in the short to medium term.