Sanstar Ltd IPO: Should You Subscribe?

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Sanstar Ltd, a major manufacturer of plant-based specialty products and ingredient solutions, is opening its Initial Public Offering (IPO) on July 19, 2024, and closing on June 23, 2024. With a Grey Market Premium (GMP) of 39% and strong financial growth in recent years, the IPO seems promising. However, investors need a clear understanding of both potential rewards and risks before subscribing. This analysis provides a comprehensive review to help make an informed decision.

Sanstar IPO Details

  • Issue Size: Rs 510.15 crore
  • Price Band: Rs 90 – Rs 95
  • Market Lot: 150 shares
  • Minimum Investment Value: Rs 14,250
  • Listing Date: July 26, 2024

Use of Proceeds

The issue, totalling approximately Rs 510 crore, includes Rs 397 crore from a fresh issue. Out of the fresh issue, Rs 182 crore will be allocated for capacity expansion and Rs 100 crore for repaying debt.

Sanstar IPO Subscription Status

The Sanstar IPO kicked off with a strong start, attracting a 4.2 times overall subscription on its first day of bidding on Friday. Investor interest varied across different categories: The retail individual investors (RIIs) part got 4.14 times subscribed while non-institutional investors (NIIs) showed even more enthusiasm, subscribing at a staggering 9.87 times. However, Qualified Institutional Buyers (QIBs) participated modestly, subscribing just 0.05 times their segment.

Overview of Sanstar Ltd

Sanstar Ltd produces plant-based specialty products and ingredients mainly from maize for food, animal nutrition, and industrial sectors. The firm operates in Gujarat and Maharashtra with a capacity of 363,000 TPA, making it India's fifth-largest in its field. 

Sanstar Key Strengths

  • Impressive Growth: From FY22 to FY24, Sanstar's operational revenue grew at a CAGR of 45%, with EBITDA and net profit increasing by 57% and 105%, respectively.
  • Profit Margins: EBITDA margins rose from 7.87% to 9.20%, and net profit margins from 3.15% to 6.17% between FY22-24.
  • Return Ratios: Sanstar boasts a Return on Equity of 31% and a Return on Capital Employed of 25%, surpassing its peers.
  • Clientele: Sanstar's major clients include AB Mauri, ITC, and HUL, among others, with 89% of FY24 turnover from repeat orders.

Sanstar Risk Factors

  • Customer Concentration: 41% of FY24 revenue came from the top ten customers, indicating high dependence on few clients.
  • Plant Commissioning Delays: Risks of delays in plant commissioning could hinder short-term growth, especially as existing facilities are already operating near their capacity limits.
  • Lower Gross Margins: Despite leading in returns and asset turnover ratios, Sanstar's gross margins are below industry average, suggesting a potential shift towards more value-added products is necessary.

Sanstar Valuation & Investment Recommendation

Sanstar Ltd has seen impressive revenue growth, spurred by increasing demand in the ready-to-eat food sector and its wide-ranging applications in different industries. The company plans to boost its maize-milling capacity by 1,000 TPD at the Dhule facility, projected to be completed by June 2025. This expansion aims to position Sanstar as the third-largest player in the industry.

The IPO seems fairly priced with a Price-to-Earnings (P/E) ratio of 20x based on FY24 earnings. The grey market premium also points to a strong market debut. Despite a higher valuation compared to its key competitors, Sanstar's robust growth trajectory, superior return ratios, a healthier balance sheet post-IPO, and significant market potential make this IPO a compelling choice for medium-to-long term investors.

For a deeper dive into this IPO, explore: IPO Corner on Liquide

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