IPO Size: Rs. 311 cr, Entirely Fresh Issue  

• For technology upgrade Rs. 98 cr
• 1,576 BLS stores for Rs. 75 cr
• Future acquisitions worth Rs. 29 cr

Price band: Rs. 129-135 per share

• Rs. 7 per share discount and 10% reservation for shareholders of listed parent BLS International Services, owning 68% pre-issue and 51% post IPO

M cap: Rs. 1,227 cr, implying 25% dilution

• Pre-IPO placement worth Rs. 13.75 cr undertaken at Rs. 125 per share on 4.1.2024

IPO Date: Tue 30^th Jan to Thu 1^st Feb 2024, Listing Tue 6^th Feb 2024

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

Digital Service Provider

BLS E-services provides Business Correspondents (BC) services to banks, e-government services and assisted e-services, with BC services accounting for 60% of FY23 revenue of Rs. 243 cr. Company has a network of 98,034 BLS Touchpoints (including 1,016 BLS stores) pan India, and it provides e-governance service in 3 states – Punjab, Uttar Pradesh and West Bengal.

Post acquisition of 91% in Zero Mass Private Limited (ZMPL) for Rs. 110 cr in June 2022, revenue from BC services surged from Rs. 18 cr in FY21 to Rs. 103 cr in H1FY24. However, most of this is from a single customer SBI, which implies high business risk.  

Structured Objects to facilitate an IPO

Each of the objects of the IPO look structured:

1. Current net fixed assets stand at barely Rs. 1 cr making Rs. 98 cr investment in technology upgrade appears steep, especially Rs. 50 cr for developing common service portal and mobile app.
2. It has 1,016 BLS stores as of date, but none of its set-up cost is capitalized in balance sheet. In that background, Rs. 75 cr for converting 1,576 BLS touchpoints to BLS stores looks unconvincing.
3. Acquisition target, for which Rs. 29 cr has been earmarked, is not yet identified.

IPO looks unnecessary as company already has Rs. 66 cr cash equivalents as of 30.9.23 and generates Rs. 30+ cr cash annually. Post IPO, current net worth of Rs. 120 cr will expand four-fold resulting in heavy dilution in existing RoE of 22%, already down from FY22’s 37% after ZMPL acquisition.  

Lower Margin = Lower Valuation Multiple

On Rs. 156 cr topline and Rs. 15 cr PAT, BLS E-services clocked single digit net margin of 9% in H1FY24. Annualising H1FY24 EPS of Rs. 2, leads to a current year PE multiple of 33x. Parent BLS International, providing visa and consular services in Asia, Africa, North America and Middle East, operates on 17% net margin on a higher topline of Rs. 1,600 cr with 29% RoE and trades at a PE multiple of 57x. Government service provider eMudhra Limited, with Rs. 350 cr topline and 20% net margin and 22% RoE, is trading at a PE multiple of 55x.

Peer PE of 55x looks unsustainable in the long run, while BLS e-services’ net margin and RoE are lower than peers. Since the business lacks entry barriers, PE of 33x is fully priced. Moreover, 8% premium to pre-IPO price of Rs. 125, undertaken 4 weeks ago, is unjustified. Corporate Promoter summoned by SEBI, as recent as Jan 2023, for bonus issue of shares and trading activities in stock, leaves some unanswered questions around compliance and corporate governance.