IPO Analysis: Global Surfaces Limited IPO

IPO Rating: Avoid

About the issue:

Global Surfaces Limited is engaged in processing natural stones and manufacturing engineered quartz. The Company is coming out with its initial public offering (IPO) of equity shares of the face value of Rs 10 per equity share. The price band of the issue has been fixed at Rs 133 to Rs 140 per equity share. The issue size is Rs 154.98 crore at higher price band.

The IPO opening date is March 13, 2023 and it will be closing on March 15, 2023. The issue is likely to be listed on the exchange on March 23, 2023. The IPO market lot size is 100 Shares and in multiple thereof. A retail-individual investor can apply up to a maximum of 14 lots (1400 shares or Rs 196,000) at upper price band.

Objects of the Issue

The Company proposes to utilize the Net Proceeds towards the following objects:

1. Investment in the wholly owned subsidiary, Global Surfaces FZE for part-financing its capital expenditure requirements in relation to the setting up of a manufacturing facility for engineered quartz at The Jebel Ali Free Zone, Dubai, United Arab Emirates (UAE).

2. General corporate purposes.

Promoter holdings:

The pre-issue shareholding is 73.55 per cent, post the IPO the promoter stake will be 55.46 per cent.

About the company:

Global Surfaces Ltd. (GSL) is engaged in the business of processing natural stones and manufacturing engineered quartz. Natural stones are produced by complex geological processes and include a number of products such as granite, limestone, marble, slate, quartzite, onyx, sandstone, travertine and others that are quarried from the earth. Natural stones are widely known for their uniqueness, aesthetic appeal, texture, colour and composition as no two natural stones are the same.

Engineered quartz, on the other hand, is a type of engineered stone used in the countertop industry and it is a composite material made of crushed stone bonded together with an adhesive. However, engineered stone market is expected to grow at a higher CAGR of 6-7 per cent between 2022 and 2027 than natural stone, which is expected to grow at a CAGR of 5-6 per cent. This is primarily due to the engineered stones' non-porous, strong, durable and stain-resistant properties. The engineered stones are also available in a variety of colours and designs, making them a preferred choice.

GSL has two processing and manufacturing units, one at RIICO Industrial Area, Bagru Extn, Bagru, Jaipur, Rajasthan and the other at Mahindra World City SEZ, Jaipur, Rajasthan. Its Unit I is strategically located near key raw materials (i.e. blocks of natural stone), which helps in sourcing raw materials and reduces logistics and transportation costs.

This Unit II set up by GSL is dedicated towards manufacturing engineered quartz. This Unit is also equipped with an R&D facility to develop, improve and test products which assist the company in keeping pace with the ever-evolving market trends and demands. Both Units are located in close proximity to each other i.e., within a range of 20 kms from one another.

GSL, through its wholly owned subsidiary, Global Surfaces FZE, intends to establish a dedicated unit for manufacturing engineered quartz in Dubai, UAE on a lease of 20 years. As of January 31, 2023, it had 302 employees on its payroll. In addition, for production it has a contract with third-party manpower firms and independent contractors for the supply of contract labours as and when needed.

Financials:

On the financial performance front, for the last three fiscals, Global Surfaces Ltd has (on a consolidated basis) posted a revenue/net profit of Rs 163.49 cr. / Rs. 20.96 cr. (FY20), Rs 175.66 cr. / Rs. 33.93 cr. (FY21), and Rs. 191.18 cr. / Rs. 35.64 cr. (FY22). For Q2 of FY22, company earned a net profit of Rs 13.59 cr. on a revenue of Rs 99.25 crore.

Valuation and Outlook

If we annualized H1FY23 earnings of Rs 13.59 crore and attribute them to post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 21.84x compared to other listed player that is available at 12 times its last twelve months earnings. In terms of price to book value, it is priced at a P/BV of 3.18x based on its post-IPO NAV of Rs. 43.98 per share and a P/BV of 2.21 based on its NAV of Rs 63.29 as of September 30, 2022 (at the upper cap). This also makes it aggressively priced. The company has not declared any dividends for the last two fiscals till the filing of this offer document. It will adopt a prudent dividend policy post-listing, based on its financial performance and future prospects.

GSL's margins are having declining trends and its RoE/RoCE has come down from 32.51per cent /32.95per cent as of March 31, 2020, to 9.12per cent /7.89per cent as of September 30, 2022, respectively. Its net capital turnover ratio too is down from 18.20 as of March 31, 2020, to 2.47 as of September 30, 2022.

Looking at these factors we suggest our readers to ‘Avoid’ the issue.