Sanstar IPO: Should you bet on the stock at Rs 95? Take a decision after looking at the strengths and weaknesses of the company

IPO Alert :Today, Friday, July 19, another mainboard IPO has opened for subscription. Sunstar Limited’s Initial Public Offer opened on July 19 and one can invest in it till July 23. The size of the IPO is Rs 510 crore, while the company has fixed the price band at Rs 90-95 per share. Apart from fresh equity, it also has OFS. Sunstar’s shares will be listed on BSE and NSE on July 26, 2024. Brokerage opinions regarding investment are mixed.

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Craze in grey market right now

There is already a craze in the grey market regarding Sunstar’s IPO. The company’s unlisted stock is at a premium of Rs 40 in the grey market. This is a 42 percent premium in terms of the upper price band of Rs 95. If this indication is correct, then the stock can be listed at Rs 137 as compared to the IPO price of Rs 95.

How is the valuation

Considering the P/E valuation, according to brokerage house SMC Global, at the upper end of the price band of Rs 95, the stock is priced at a pre-issue P/E of 19.98x on annualised FY24 EPS of Rs 4.75. Post issue, the stock is priced at a P/E of 25.93x on EPS of Rs 3.66. Looking at the P/B ratio at pre-issue Rs 95, the book value P/BVX is Rs 18.97 of 5.26x. Post issue, the book value P/BVX is Rs 35.71 of 2.66x.

Considering the P/E valuation, at the lower end of the price band of Rs 90, the stock is priced at a pre issue P/E of 18.93x on annualized FY24 EPS of Rs 4.75. Post issue, the stock is priced at a P/E of 24.57x on EPS of Rs 3.66. Looking at the P/B ratio at Rs 90 pre issue, book value P/BVX of 4.98x is Rs 18.07. Post issue, book value P/BVX of 2.52x is Rs 35.71. The brokerage has given a neutral rating on the subscription.

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Strength of the company

• Largest manufacturer of maize based specialty products and ingredients in India.
• Specialty products and ingredients solutions players cater to diverse industry segments and are poised to benefit from mega industrial trends.
• Strategically located, sustainability-driven, state-of-the-art manufacturing facilities
• Global presence in markets with high entry barriers
• Manufacturing facility in Kutch, Gujarat
• Strong financial growth with strong performance metrics
• Expanding manufacturing capabilities to gain additional market share
• Growing global presence and growth in current geographies.
• Focus on increasing revenue contribution from derivative products

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Risk Factors with the Company

• The company has had negative cash flow in the past period and negative cash flow may continue in the future as well.
• It relies heavily on its top 10 suppliers for raw materials and work-in-progress goods used in its manufacturing process.
• The cost of raw materials used in its manufacturing process is subject to volatility.

About IPO

Sunstar plans to raise Rs 510.15 crore from the market through its IPO. In the IPO, the company is issuing 41,800,000 fresh equity shares worth Rs 397.10 crore. Whereas, the existing investors of the company will sell 11,900,000 shares worth Rs 113.05 crore through Offer for Sale i.e. OFS. The company will use the money raised from the IPO for capex required for expansion, payment of debt and other company purposes.

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How much reserve for whom

35% of Sunstar’s IPO is reserved for retail investors. 50% is reserved for qualified institutional buyers (QIB). 15% is reserved for non-institutional buyers (NII). The lot size of this IPO is 150 shares. This means that retail investors will have to invest at least Rs 14,250. The maximum amount that can be invested is Rs 199,500.

what the company does

This Ahmedabad-based company manufactures liquid glucose, dried glucose solids, maltodextrin powder, dextrose monohydrate, indigenous maize starch, refined maize starch, gluten, fiber and protein among other products. The company has two production units in Kutch in Gujarat and Dhule in Maharashtra. As of May 18, 2024, the company’s total production capacity was 3,63,000 tonnes per annum (1,100 tonnes per day).