What you must know about the MCON Rasayan India IPO

MCON Rasayan India Ltd is a seven year old company headquartered in Mumbai with its manufacturing plants in the industrial heartland of Gujarat. MCON Rasayan India Ltd is into the business of manufacturing, marketing and selling modern building material and construction chemicals. It sells construction chemicals in powder form and in liquid form and its overall portfolio of construction chemicals and building materials put together is over 80 products in all. Its powder products are essentially in the form of ready mix plaster, tile adhesives, block adhesives, wall putty, polymer mortar and micro concrete. Its portfolio also includes floor hardeners. Its liquid form products include polyurethane based liquid membrane, bonding agents, anti-corrosive coatings, paints and curing compounds.

Most of the products manufactured by MCON Rasayan India Ltd are marketed under the brand banner of MCON. It has two manufacturing plants located at Valsad and Navsari, both in south Gujarat. While the Valsad plant has an installed capacity of 2,500 metric tonnes per annum (MTPA), the Navsari plant has an installed capacity of 12,500 MTPA. Obviously its customer base is largely in the construction and real estate development sector. Some of its marquee clients include the Runwal group, Lodha group, Rustomjee group, DB Realty and the Indian Railways. MCON Rasayan India Ltd markets its products through a network of over 400 retailers in Mumbai and supplies to over 200 mega real estate projects.

Understanding NSE-Emerge IPO issue of MCON Rasayan India Ltd

The NSE-IPO of MCON Rasayan India Ltd entails the issue of 17.10 lakh shares at a price of Rs. 40 per share having a total IPO size of Rs. 6.84 crore. The IPO will be a fresh priced issue and entirely by way of fresh issue only. While GYR Capital Advisors Ltd will be the lead manager to the IPO, Link Intime India Private Limited will be the registrar to the issue. The company was promoted by Mahesh Ravji Bhanushali. The fresh portion will be used for funding the working capital of the company and for general corporate purposes. The market maker portion has an allocation of 90,000 shares reserved for them.

As per the terms of the offer, 50% of the net offer is reserved for the HNI / NII investors while the balance 50% is reserved for the retail investors. The minimum lot size will be 3,000 shares. The retail segment can apply for a minimum lot of 1 lot comprising of 3,000 shares with an investment value of Rs. 120,000 applying the fixed price of Rs. 40 per share. That will also be the maximum that the retail investors can put in as an application. For HNIs, they can apply for minimum of 2 lots of 6,000 shares with an investment value of Rs. 240,000 at the pre-decided IPO price. Promoters now hold 91.45% stake in MCON Rasayan India Ltd.

The issue opens for subscription on 06th March 2023 and closes for subscription on 10th March 2023 (both days inclusive). The basis of allotment will be finalized on 15th March 2023 and the refunds will be initiated on 16th March 2023. In addition, the demat credits are expected to happen on 17th March 2023 and the stock will list on 20th March 2023 on the NSE SME segment. This is the segment, in contrast to the mainboard, where IPOs of small and medium enterprises (SMEs) are incubated.

Look at the financials of the IPO of MCON Rasayan India Ltd

The table below captures the key financials of MCON Rasayan India Ltd for the last 3 completed financial years.

Data Source: Company DRHP filed with SEBI

There are few key takeaways from the financials of MCON Rasayan India Ltd which can be enumerated as under

1. The growth of the company has been quite erratic. While the sales have doubled over the last two years, the entire growth came in FY22. This could be due to capacity slack, but this is an area to focus on in the coming quarters.
    

2. The PAT margins in a best case scenario are just a tad above 2% and that is not too encouraging, although building materials and chemicals tends to be a low margin business. This, combined with erratic RONW, could impact valuations post listing.
    

3. Asset turnover ratio is above 1, which is a good signal in an intensive industry. However, when the RONW is already erratic, the additional capital raised by the company through this IPO would start to put pressure on its return ratios.

Overall, the numbers do look like a mixed bag at this point of time.

Some areas to watch out

There are some areas to watch out for in this IPO. For instance, if you look at the FY22 numbers, the raw material cost is 58% of sales, which his understandable. However, other expenses have consistently been around 30% of sales. Secondly, the net cash from operations have been consistently negative for the last 3 financial years, which means there is very little internal cash that the company is generating. The creditor outstanding amounts of Rs4.55 crore hint at challenges on the working capital management front. Investors may have to take a cautious and measured view of investing in the IPO.