Steep pricing takes the gleam away!

 

OFFER AT A GLANCE
Name	Ksolves India Ltd
Offer Amount	Rs 4.02 cr
Offer Quantity	4.02 lakh shares of Rs 10 each
Offer on Total Equity	27.13%
Post-issue Promoter stake	68.02%
Post-IPO Capital	Rs 1.48 cr
Offer Price	Rs 100
Minimum Application Qty	1200
Offer Opens	June 23, 2020
Offer Closes	June 26, 2020
Listing	SME Platform of NSE
Rating	Nil
Lead Manager	Shreni Shares
Market Maker	Shreni Shares
Underwriter	Shreni Shares (100%)
Registrar	Bigshare Services

 

The Offer

The present offer is an initial public issue of 4,02,000 equity shares of face value of Rs 10 at a price of Rs 100 a piece aggregating to Rs 402 lakh from the Delhi-based six years old software products and service provider namely, Ksolves India Ltd (KIL). Of the public offer, 20,400 shares (Rs 20.40 lakh) are reserved for the Market Maker. The public float constitutes 27.13% of the company’s post-IPO paid up equity share capital (Rs 1.48 cr). The promoters’ stake in the enlarged capital would be 68%.

This fixed price offer is proposed to be listed on the SME platform of NSE. Investors should apply for a minimum quantity of 1200 shares (Rs 1,20,000). The issue manager, Shreni Shares, who is also acting as a Market Maker, has underwritten the entire issue amount of Rs 4.02 cr. It’s worth noting that in the maiden IPO handled by Shreni, it had underwritten to an extent of only 15% (Rs 30.60 lakh) of the issue amount.

 

Issue Object 

Of the IPO proceeds, Rs 40 lakh (10%) is budgeted for issue related expenses. Working capital accounts for Rs 280 lakh (69.7%) and the balance (Rs 82 lakh or 20.4%) is earmarked for general corporate purpose. 

 

Business & Background  

Originally incorporated as Keyon Softwares Private Ltd in July 2014, Ksolves is reportedly an ISO certified software services and product company engaged in software development, enterprise solutions and consulting, providing a range of Information Technology (“IT”) solutions to companies across sectors such as Real Estate, E-Commerce, Finance, Telecom and Healthcare, etc. 

The company has been promoted by 41-year-old couple namely Ratan Kumar Srivastava and Deepali Verma who claim to have an experience of 15 years and 7 years respectively. Srivastava is a B. Tech in Computer Science & Engineering and has worked with Tech Mahindra, Birlasoft, HSBC and Persistent Systems. Verma holds degree in Master of Commerce.

 

Financial Performance

The six years old KIL has a fairly decent track record on the financial front. From Rs 3.4 cr in March 2018, the company’s top line has steadily grown to Rs 8.14 cr in March 2020. In fact, its consolidated revenue amounted to over Rs 10 cr in fiscal 2020. Net profit too has shot up from Rs 5.50 lakh in 2018 to Rs 67 lakh in 2020. The company achieved this on an equity capital of just Rs 2 lakh.

On April 23, 2020 the company made a Rs 10 lakh rights issue at a premium of Rs 91 lakh and on the very next day it issued 8:1 bonus capitalizing Rs 96 lakh. Thus, on the date of signing the offer document, the company’s capital stood at Rs 108 lakh which is proposed to be enhanced to Rs 148 lakh post-IPO. 

 

Ksolves Financial Track
(Amount in Lakh)	Consolidated	Standalone	Standalone	Standalone
Period Ended	Mar-20		Mar-19	Mar-18
Months	12	12	12	12
Revenue	1013.23	814.10	541.79	340.43
Other Income	0.41	0.41	0.83	0.41
EBITDA	120.20	106.72	29.52	13.51
OPM%	11.80	13.10	5.30	3.80
Interest	0.44	0.00	0.00	0.00
Depreciation	28.93	16.94	8.04	3.81
Net Profit	67.99	67.20	15.83	5.50
Equity	2.00	2.00	2.00	1.00
Equity Pending	148.20	148.20	2.00	1.00
Reserves	85.59	84.79	17.60	20.51
Reserves Pending	442.39	441.59	17.60	20.51

 

Valuation

KIL has an earned surplus (Reserves) of Rs 85 lakh against which it is now asking a share premium of Rs 362 lakh (Rs 90 per share) from the investing public. From the earnings point of view for the fiscal 2020, the company posted a consolidated net profit of about Rs 68 lakh which yields an EPS of Rs 4.60 on the post-issue equity of Rs 1.48 cr. The offer price Rs 100 discounts the current earnings more than 21 times which is certainly high for a company of KIL’s size and stature. 

 

Perception & Concern

The company has changed its auditor on the eve of the IPO. The Delhi-based company has now appointed a Jaipur-based firm as its statutory auditor. Father of Deepali Verma (one of the promoters) is drawing professional fees from the company as an advisor! Mother of the same promoter has drawn salary from the wholly owned subsidiary of the public company.

Also, group entities viz. Ksolves Technology Private Ltd and Ksolves LLC are engaged in the similar line of business of IT and IT enabled Services and the public company has not entered into any non-compete agreement with any of the closely held firms.

 

Market Maker & Lead Manager

The Rs 4.02 cr equity issue of KIL is only the second IPO managed by the investment banker Shreni Shares. The maiden IPO managed by Shreni namely Cospower Engineering is currently quoted at about 18% premium. Even though Cospower’s price record may exude optimism, one cannot ignore the fact that Shreni has a poor `market making’ record. The first IPO (Gian Life) handled by Shreni as market maker could provide liquidity for only about 30% of the days traded as against the minimum stipulated 75%. In the second case (Cospower), it was slightly better at 40%. If a share is not traded for more than half of the days, what’s the point in holding the price at a premium?