Stove Kraft shares may list at 8-10% premium over issue price: Analysts

Stove Kraft is unlikely to replicate the stellar listing performance staged by Indigo Paints and Home First Finance, when its shares will list on the bourses on Friday, February 5, believe analysts.

In the grey market, shares of Stove Kraft were commanding a premium of Rs 30-40 per share, analysts suggest, implying an upside of 8-10 per cent over the issue price of Rs 385 per share. This was lower than the listing premium witnessed by Indigo Paints (up 75 per cent) and Home First Finance (up 19 per cent).

Over the last few days, the premium on Stove Kraft has come down by nearly 50 per cent from Rs 70-80 per share as investors are concerned about the firm's financial performance and pricing vis-a-vis peers,  analysts believe. Some weakness in the secondary market ahead of the Union Budget has also dented the performance of the stock in the grey market.

The company, which is engaged in the manufacture and retail of a wide and diverse suite of kitchen solutions under 'Pigeon' and 'Gilma' brands has a revenue CAGR of 13 per cent over FY18-20. During the same period, the firm's EBITDA (earnings before interest, tax, depreciation and amortization) margin were in the lower range of 2-5 per cent.

In the first half of FY21, the company reported improved performance with EBITDA margin of 13.7 per cent and net profit of Rs 28 crore on account of a significant reduction in operating expenses.

Analysts, however, believe that the sustainability of improved profitability performance remains a critical factor.

Keshav Lahoti, equity research analyst at Angel Broking said, "We are not bullish on the business model of the company from a long-term perspective. For many years, it has made losses and not been profitable. Moreover, its margins are lower than that of peers - Hawkins and TTK Prestige - and even the return ratios are not impressive."

The brokerage in its IPO note had given a 'Neutral' rating to the Stove Kraft issue.

Aggressive pricing to blame?

Analysts had also raised concerns over the issue's aggressive pricing as compared to its peers. The company had priced its issue at 34.5 times PE on a trailing basis while its peers TTK Prestige and Hawkins Cookers are currently trading at 61 times and 47.5 times respectively. On FY20 basis, the company priced its issue at 301.5 per cent PE.

Besides that various brokerages had highlighted that the company's trademark for their marquee brand ‘Pigeon’ is the subject matter of litigation and that there are various proceedings involving the company, their promoters and their director. Any unfavourable decision in connection with such proceedings, individually or in the aggregate, they believe, could adversely affect the company’s reputation, business and financial condition.

The Rs 413 crore initial public offer (IPO) that ran between January 25-28 was subscribed 18 times. The qualified institutional buyers (QIBs) category was subscribed 8 times, non-institutional investors 32.72 times and retail individual investors 26 times.

A few brokerages, however, were bullish and had 'Subscribe' ratings on the issue given the firm's strong growth potential and brand value.