IPO Size: Rs. 413 cr

• 60% is offer for sale (OFS) by promoter (79% stake to drop to 61%)
• Rs. 161 cr is fresh issue, for data center (Rs. 46 cr), working cap (Rs. 40 cr), debt repayment (Rs. 35 cr), product development (Rs. 15 cr), future growth (Rs. 15 cr)

Price band: Rs. 243-256 per share

M cap: Rs. 2,000 cr, implying 21% dilution

• Rs. 39 cr pre-IPO placement done on 5^th May 2022, at 243.20/sh to 3 funds

IPO Date: Fri 20^th May to Tue 24^th May 2022, Listing 1^st Jun 2022

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

A Digital Products Company

2 business segments, with revenue split equally:

1. Digital Trust Services: 38% market share in Indian digital signature certificates (DSC); sticky business, with annual validity period.
2. Enterprise Solutions: 626 channel partners in India and overseas, 38% revenue CAGR, from Rs. 36 cr in FY19 to Rs. 71 cr in 9MFY22.   

Growing Business

FY19 revenue of Rs. 102 cr rose to Rs. 131 cr in FY21 and further to Rs. 137 cr in 9MFY22, partly due to international revenue increasing from Rs. 10 cr in FY19 to Rs. 26 cr in 9MFY22. Since the base has been small, historic growth is healthy, but needs to be monitored for sustainability as growth rates will taper on a larger base.

Thanks to operating leverage, net margin expanded from 17% in FY19 to 22% in 9MFY22 with PAT at Rs. 30 cr for 9m FY22. EPS for 9m FY22 stands at Rs. 4.36, up from FY21’s 2.5.

High Debtors

Debtors jumped to Rs. 53 cr as of 31.12.21, from an average of Rs. 15-20 cr earlier, as Q2 and Q3 are the peak season for business. A sizeable government payment was received subsequent to 31.12.21. However, debtors outstanding for over 6 months nearly tripled to Rs. 8 cr, as of 31.12.21, from average Rs. 2-3 cr in earlier periods. As debtors remain outstanding for nearly 2.5 months, there is a need for working capital to support growth.

Moreover, promoter group company Bluesky Infotech is company’s highest revenue contributing channel partner, accounting for 8% of revenue, or 16% of digital trust services revenue. This number is quite significant and highlights risk of revenue dependence on a related party.  

Lagging in Digital Trust Services

When Indian Digital Trust Services industry grew at 16% CAGR between FY19-21, company’s revenue from this vertical remained stagnant at Rs. 65 cr per annum, despite a network of over 91,000 channel partners. Thus, while company’s overall revenue CAGR was 14% between FY19-21, it lagged the then 18% industry CAGR. In this scenario, while Indian digital security and paperless transformation market of Rs. 2,000 cr is expected to grow at 26% CAGR over the next few years, it remains to be seen, how well the company can capitalise on the opportunity. While market is large and growing, so is the competition and evolving technology.

Unlikely Valuation Upside

eMudhra’s post-money m cap of Rs. 2,000 cr for Rs. 50 cr FY23E PAT translates into PE multiple of 40x, which does not leave much upside for incoming investors. While there is no comparable peer, another digital products company Quickheal also clocks high net margin of 30%, is ruling at a PE of 10x and m cap of Rs. 1,030 cr, although its growth has been stagnant.

While eMudhra has grown well, especially in 9MFY22, PE of 40x for Rs. 200 cr topline is ‘fully-priced’, in the current market conditions. Another ‘digital’ company Route Mobile is ruling at a PE multiple of 35x, despite posted 33% revenue CAGR and 46% PAT CAGR between FY19-22, which stood at 22% and 32% respectively for eMudhra.  

As valuation multiples contract due to lower risk premium and listed stocks correct sharply on a daily basis, the 5% premium to the pre-IPO price just 2 weeks ago, on 5^th May 2022, is also unjustified.