What you must know about Silkflex Polymers IPO?

About Silkflex Polymers (India) Ltd

Silkflex Polymers (India) Ltd was incorporated in the year 2016, to trade in textile printing inks and water-based wood coating polymers which are manufactured by its Malaysian group company, Silkflex Polymers SDN BHD. Silkflex Polymers (India) Ltd currently offers more than 108 textile printing ink products and 51 wood coating polymer products, largely for use in the textiles and the furnishing industry. While the company is headquartered in the state of  West Bengal, it has 5 branch offices located across the states of Gujarat, Maharashtra, Tamil Nadu, Rajasthan, and Punjab. Silkflex Polymers SDN BHD of Malaysia is recognized as one of the leading manufacturers of garment printing ink in Malaysia with a strong global franchise. The business of Silkflex Polymers (India) Ltd is to market these products in India, that are manufactured by its Malaysia affiliate company. The company also has a capacity of 1000 MT per month; and also has its own thermal reactor. Being a trading and marketing office, the domestic business is not too manpower intensive and it has 28 permanent employees in India, across its various offices.

What sets the Silkflex Polymers manufacturing process apart is that even their inks are manufactured and formulated in-house, from the polymer and resin right up to the final ink. Since the performance of the ink is totally predicated on the properties of the polymers and the resin, the company has been able to design and tailor-make for specific applications. The Malaysian company, Silkflex Polymers SDN BHD, is in the list of nominated suppliers for PUMA, C&A and H&M, and services all major apparel brands in the world. It has recently forayed into Portugal, Turkey, and Spain. The company has also introduced fully water-base wood coating products, where extremely hard finishes can be achieved rapidly. This product is currently used by some of the largest furniture brands and in numerous prestigious buildings. Silkflex Wood Coating can replace traditional solvent-based wood lacquers, and is also an eco-friendly wood coating product.

Key terms of the Silkflex Polymers (India) IPO

Here are some of the highlights of the Silkflex Polymers (India) IPO on the SME segment of the National Stock Exchange (NSE).

• The issue opens for subscription on 07th May 2024 and closes for subscription on 10th May 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 book building issue has been fixed at ₹52 per share. Being a fixed price issue, there is no question of price discovery in this case.
   
• The IPO of Silkflex Polymers (India) Ltd has only a fresh issue component and no 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, Silkflex Polymers (India) Ltd will issue a total of 34,82,000 shares (34.82 lakh shares), which at the fixed IPO price of ₹52 per share aggregates to fresh fund raising of ₹18.11 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 34,82,000 shares (34.82 lakh shares) which at the fixed IPO price of ₹52 per share will aggregate to overall IPO size of ₹18.11 crore.
   
• Like every SME IPO, this issue also has a market making portion with a market maker inventory allocation of 1,78,000 shares. Shreni Shares 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 Tushar Sanghavi, Urmi Raj Mehta, M/S Tushar Lalitkumar Sanghavi HUF, and M/S Lalitbhai H Sanghvi HUF. The promoter holding in the company currently stands at 99.84%. However, post the fresh issue of shares in the IPO, the promoter equity holding share will get diluted to 69.89%.
   
• The fresh issue funds will be used by the company for funding the acquisition of land, funding capital expenditure towards the purchase of plant and machinery and also partially for funding working capital needs of the company.
   
• Shreni Shares 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 Shreni Shares Ltd.

IPO allocation and minimum lot size for investment

Silkflex Polymers (India) Ltd has already announced the market maker allocation at 1,78,000 shares as inventory for market making. Shreni Shares Ltd will be the market maker for the IPO. The net offer (net of market maker allocation) will be divided between the retail investors and the HNI / NII investors. The breakdown of the overall IPO of Silkflex Polymers (India) Ltd in terms of 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 ₹104,000 (2,000 x ₹52 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 ₹208,000. 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 Silkflex Polymers IPO

The SME IPO of Silkflex Polymers (India) IPO opens on Tuesday, 07th May 2024 and closes on Friday, 10th May 2024. The Silkflex Polymers (India) Ltd IPO bid date is from 07th May 2024 at 10.00 AM to 10th May 2024 at 5.00 PM. The Cut-off time for UPI Mandate confirmation is 5 PM on the issue closing day; which is 10th May 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 May 14th 2024, will be visible to investors under the ISIN Code – (INE0STN01015). 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.

Financial highlights of Silkflex Polymers (India) Ltd

The table below captures the key financials of Silkflex Polymers (India) 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 have grown at a robust pace in the last 2 years and in the latest year, the total sales has grown nearly 70% over FY21. However, the net profit margins (PAT margins) have been rather tepid and steady at under 2.5%, which could be more of the type of pricing and IRR based model followed by the Indian outfit.
   
• Net margins of the company have been steady in the latest year at over 2% and have shown a degree of consistency over the last 3 years. The return on equity (ROE) has been steady at over 9% in the latest year, while the ROA is over 3% in last 3 years.
   
• The asset turnover ratio or the sweating ratio has been above 1.40X and that is a good sign that sales have picked up to cover the asset outlays. However, since the company is more of a trading company, the asset turnover may not be of too much relevance.

The company has latest year EPS of ₹0.97 and we have not included the weighted  average EPS, since it would not represent the steady growth the company has achieved. The latest year earnings are being discounted by the IPO price of ₹52 per share at 53-54 times P/E ratio. That does appear to be quite high for a pure trading company, which is more of a representative of a single manufacturer based out of Malaysia. One has to look at the P/E ratio from two perspectives. Firstly, the 9-months EPS for FY24 is marginally higher at ₹0.97, which translates into full year extrapolated EPS of ₹1.29 per share, which now makes the valuation only slightly more compelling at around 40-41 times P/E ratio. The company is not likely to offer any positive surprises in the coming years.

The other story one must appreciate here is that Silkflex Polymers (India) Ltd operates as the trading and marketing arm of its Malaysian affiliate company. While the Malaysian company may have some advantages, the Indian outfit is likely to be constrained by the margins that typical retail entities would get; which is normally around 2-3%. That is largely an IRR based pricing so any positive surprises from this business are not likely in the near future. Investors must invest in this IPO with the clear understanding that the net margins would continue to remain steady in the range of 2-3%, with no positive surprises likely for investors. That would be an overhang, especially when IPO valuations are already steep.