IPO Review - Discussion until listing


(Yogesh Sane) #1

Each year, many companies sell their shares to public in an IPO including SME companies. These are new, young, dynamic companies that can turn out to be exciting new investment avenues. Not all IPOs are good going by their track record post listing. However there are also quiet a lot of companies that have done well.

A typical IPO prospects runs into 400 pages. It is difficult for any single investor to go through the entire prospectus and list of all key details in a short page while IPO is still open. An IPO is open for subscription for a short time. A discussion about pros and cons of an IPO before it closes will provide good insight for anyone wanting to subscribe during the IPO as well as buying post listing. However, it takes lot of efforts to create a separate thread like the regular company thread with all the relevant details. such details typically emerge during the due diligence process. Moreover, many IPOs are not good so they many not deserve a separate thread.
Keeping this in mind and with the permission of admin, I am creating this thread to discuss IPOs (both current and forthcoming) until the IPOs listed and / or we have all the details. This thread can be used only until listing. Post listing, a separate thread should be created as per the forum guidelines. Anyone applying for IPO should have collected required information for creating a thread.

I have prepared a small template which can be used to post details of an IPO or gather relevant details for creating separate thread.

IPO Preview < Company Name>

Story
< Main sources of revenue, expenses and capex>
< Competitors>

Brief History
< Key events in company history such as change of ownership, new products, plants, segments, geography etc>

Financials
< key numbers like sales, profits, debt etc>
< key ratios relevant for industry>
< Du Pont analysis recommended>

Corporate Governance
< promoter characteristics - age, education, history etc>
< promoter salary, dividends, tax payments, debt repayments etc>

IPO Details
< shares offered>
< offer price>
< number of shares outstanding post issue>

Objects of the issue
< main objects and amounts>
< current and proposed capacity and utilization and timeline (for manufacturing companies)>

Valuation
< estimated market cap - shares outstanding (post issue) * offer price>
< PE, PB ratios on a post issue basis >

Investment Rationale
<why is this issue interesting (listing gains does not count)>

Key Risks
< risk factors>


Vivek Gautam Portfolio
IPO for airport vertical by GVK power
Vivek Gautam Portfolio
(suhagpatel) #2

@Yogesh_s much needed topic. Thanks for starting a thread on this. Considering the vast experience of the community here, i think it will help to drill down the company on table.

Regards,
Suhag


(Yogesh Sane) #3

IPO Preview One Point One Solutions Ltd
Story
One Point One Solutions Ltd is a Mumbai based provider of business process management (BPM) services such as Inbound and Outbound Call, Back Office/Transaction Processing, Data management and Business Analytics, Integrated Telephony Management, Customer Relationship Management, Sales Management, Document Management, Payment Gateway Management, Order Booking Management and IVR Solutions Management etc. Company’s customers include Bharti Airtel Limited, Videocon d2h Limited, Baroda Pioneer Asset Management Company Limited, Dish Infra Services Pvt Ltd, LIC Mutual Fund Asset Management Limited, Shop CJ network India Private Limited, Wonderchef Home Appliances Private Limited.
Employee costs are key expenses and office furniture such as computers is key capex.

Company’s competitors include Allsec Technologies Ltd, Datamatics Global Services Ltd, Firstsource Solutions Ltd.

Brief History
Company was incorporated in 2008. Initial Subscribers to the Memorandum of Association transferred their entire shareholding to Arjun Bhatia and Akashanand Karnik on January 07, 2014 in the ratio of 66.40% and 33.60% respectively. Further, Akshay Chhabra acquired entire shares from Arjun Bhatia pursuant to invocation of pledge agreement dated July 24, 2015. Subsequently, Company allotted 5,00,000 equity shares to Tech
Worldwide Support Private Limited on March 27, 2017. Akshay Chhabra and Tech Worldwide Support Private Limited are current promoters of our Company.

Financials
image

Company has grown rapidly since current promoters have acquired the company.

Corporate Governance
Company is promoted by 44 year old Akshay chhabra who holds a bachelor’s degree in Engineering from Mumbai University.
Company has not paid any dividends, pays taxes at full rate, and has not repaid any debts in the past. Part of the IPO proceeds will be used to repay debt.
Key Shareholders (pre-issue).


Chhabra family effectively controls 99% of the company. Post issue their shareholding will come down to 60%.

IPO Details
Company is selling 66 lakh shares at 65-67 range. Shares outstanding after the issue will be 1.67 cr shares valuing the company at 112 cr on a post issue basis.

Objects of the issue
Repayment of loans including loans from promoter (26 cr), working capital (10 cr), general corporate purposes (approx 8 cr).

Valuation
Company is being valued at 112 cr on a post issue basis. Based on FY 17 PAT of 6 Cr, PE ratio works out to be 19. Based on FY 17 book value of 17 Cr shares are valued at 6.5 times book value.

Investment Rationale
Opportunity size is large as customer service, call centers etc are rising. More and more companies are now offering these types of services and / or outsourcing these functions. Company has executed well generating strong ROE of 53%. Valuation at which shares are offered is also fair. Yes Bank is an anchor investor. Traditional IT services companies are much more expensive than BPM companies for these type of services.

Key Risks

  1. Top ten customers contributed 70.54% of total revenue.
  2. Wage pressure. Manpower intensive. These services are in demand only if these are cheap. Higher wages will reduce opportunity size.
  3. Peers do not have a good track record in the market.
  4. Company’s track record is limited.
  5. Shares are issued at Rs 9 to corporate promoter (Tech Worldwide Support Private Limited) just 8 months ago.
  6. Tech worldwide is also a lender. IPO proceeds will be used for repayment of loans from promoter.
  7. Large dilution through IPO. Shares offered are 65% of pre-issue capital of the company.

Disc: Applying for IPO.


Vivek Gautam Portfolio
Yogesh's blue chip 10 Portfolio
(AmitContrarian) #4

Great Initiative @Yogesh_s

Few things from my side -

The margins of SME just before IPOs seems to be a very consistent story -

Do you have any idea why margins (4% 4% then jumped to 7%) in FY17 improved by 175% and is this sustainable ?

I think the completely opposite is happening , Due to cost arbitrage ( cheap english speaking labour ) lots of MNCs move their Call centers to India that worked out pretty good in last decade or so.
But now lots of tech companies are building smart AIs softwares thats going to replace these call centers. This may not happen over night but going to happen eventually.

Also cost arbitrage is shifting to countries like Pakistan and Bangladesh , As India grows the wages going to grow high so in long run this not going to work out as well.

I would not pay 19 times earnings for business which going to decay over time .

Thanks,
Dhruva


(Yogesh Sane) #5

SMEs start out small so fixed costs get spread over a larger revenue base as company grows thus resulting in growth in operating margins. In case of one point one, SG&A declined from 19 Cr 18 Cr while salaries as a % of sales declined from 63% to 60%. these two are largest costs and have caused operating margins to jump from 8% to 17%. Net margins have grown less than operating margins because of rising depreciation costs. Most of the gains in the margin is sustainable. Allsec has an operating margin of 21%.

AI in call center is years away. Chatbots etc are there but not very effective. In India we need multilingual support centers that understand idiosyncrasies of Indian customers. One Point One provides call center in 13 languages. Moreover, companies are now waking up to the need to of customer service and have the budget to do so. AI will compliment and not replace humans in call centers. It will be an advantage as and when it becomes maintream and not a threat.


(Yogesh Sane) #6

Promoters wait until margins reach a more sustainable level so that IPOs don’t get cheap valuation. That’s not necessarily bad. Afterall, promoter is selling or diluting stake so he/she does not want to sell cheap. I don’t think this is a case of promoter jacking up numbers just before IPO. May be it is still happening in some cases but not a norm.
Promoter culture is also changing especially mid and smallcap companies. They are now targeting market cap and becoming minority shareholder friendly. All signs of a maturing capital market.


(Gaurav Agarwal) #7

Instead of buying this company at PE of 19. Why do not you look at Hinduja Global at PE of 9-10?

The need of thread for IPO is well appreciated but solution you proposed will have problems in future. For example

  1. Multiple IPO can be in market at same time. This will create lot of confusion amongst posters and readers. They might get confused about which company they are writing & reading.
  2. Most of the knowledge about companies in this thread will be lost.
  3. The thread will be buzzing all the time and people will have to come and check if someone has commented about company they are interested in.

Instead I propose a regular thread should be opened for IPO and later-on moderators can change the title removing IPO from the heading.

Thanks


(AmitContrarian) #8

I am not worried about AI replacing Humans , The question is are they ready about the disruption going to happen in this space ? Have they mentioned in their DRHP that they are working towards it ?
It would be good if AIs replace humans then Margins will go up for the industry.


(AmitContrarian) #9

That will not be a problem … As an investors i am always happy to read about something new.


(AmitContrarian) #10

Generally this doesn’t happen with sales growing 22% CAGR.

Instead of speculating i feel its good to write to the company , related to what lead to sudden jump in the margins.
I would buy your point if its a asset heavy business require lots of initial investment, This doesn’t seems like the one.


(malayruparel) #12

I belong to IT field and have been closely observing recent disruptions due to Hyper automation and AI in IT and BPM services. Following are my observations:

Industry outlook
Hyper automation and AI product development companies are disrupting markets while IT provider and BPM providers are being disrupted. Cost saving through AI and Automation is in the roadmap of Banking, Insurance, Auto companies and have specific KPIs to track it. Leading private banks are able to reduce manpower without impacting the sales and customer experience. Hyper Automation and AI has already impacted substantial chunk of revenue of IT and BPM companies. IT companies are managing it by being automation implementers however BPM being the lowest in chain is impacted severely. L1 work of voice support service is evaporating at faster rate. Contract renewal for L1 support is being negotiated at 30-60% lower. Even if company manages to secure work, it is difficult to scale as growth requires trained manpower and industry iteration is very high.
Valuation
Peer valuation – Considering that established BPM player Hinduja solution is trading at 9.96 and midsized IT company trading at 18.30 PE, valuation of One Point solution looks stretched.


(James Sebastian) #13

Thank you @Yogesh_s for initiative.

Would you be able to provide the link to draft IPO prospectus ? That helps others for review and ask further questions in this forum for peer evaluation. In General, How/where we can locate SME IPO draft prospectus ?

One specific question on "One Point One Solutions"
What percentage of business would be domestic and what percentage from exports ?
Domestic BPOs are a fragmented market.
What would be market share of this company in domestic BPO business?
How big this would be comparing other domestic focused BPOs. I assume majority of business from India as many customers listed are within India.


(suhagpatel) #14

Check NSE/BSE site and you will find DRHP for the company. Normally SMEs get listed only on one exchange so you may need to check both to find out where its listing.

Regards,
Suhag


(James Sebastian) #15

Thank you for the guidance. I never looked at IPOs closely, hence the question. The answer helps all such investors.
I am adding the link to DRHP for anyone interested. One point One is to be listed in NSE Emerge.


(Adiga) #16

http://www.sebi.gov.in/sebiweb/home/HomeAction.do?doListing=yes&sid=3&ssid=15&smid=10


(James Sebastian) #17

Good and thank you, Looks like the link gives listing of DRHP filing to SEBI.
Which link will show me all upcoming IPOs, be in NSE/BSE main board, SME, Emerge etc ?


(aerofire) #18

Found this link - https://www.geojit.com/ipo/ipo which list all IPO’s.


(skrksb61) #19

Chittorgarh.com is another useful site.


(Hashims) #20

http://www.ipocentral.in/ipo-discussion/sme-ipo/one-point-one-solutions-ipo/
One more similar site to see upcoming IPOs, this site also features with visitors / members comments


(suhagpatel) #21

Some big guys are invested in One Point One Solutions.