Verdict: A Smart Engineer

IPO Snapshot:

SoftTech Engineers is entering the primary market on Friday 27^th April 2018 to raise Rs. 23 crore via fresh issue of up to 24 lakh equity shares of Rs. 10 each and an offer for sale (OFS) of upto 4.8 lakh equity shares, both in the price band of Rs. 78 to Rs. 80 per share, by investor Rajasthan Trustee Co. Representing 30.26% of the post issue paid-up share capital, OFS portion is 17% while fresh issue proceeds of Rs. 19 crore will flow to the company. Issue is closing on Thursday 3^rd May and listing on NSE Emerge (SME exchange) is likely on 11^th May.

Company Overview:

SoftTech Engineers, established in 1996, is an Architecture, Engineering and Construction (AEC) focused software product firm, developing e-governance and construction ERP products for smart city projects, municipal corporations, urban local bodies, development authorities and work organizations.

Objects of Issue:

Fresh issue proceeds of Rs. 19 crore are proposed to be used for:

• Product development Rs. 6.62 crore
• Marketing costs (domestic and overseas) Rs. 5.98 crore
• Unsecured loan repayment Rs. 2.03 crore
• Balance general corporate purposes & issue expenses Rs. 4.34 crore

Shareholding Pattern:

The promoter, an IIT Mumbai alumnus, along with his family, holds 56.92% stake in the company, which will reduce to 42.60% post IPO. Investor since 2014, Rajasthan Trustee Co, owning 26.77% stake currently will part exit with ~11% IRR (in 4years) and a reduced holding of 14.94% post IPO.

Financial Performance:

Revenue CAGR for the past 4 years from FY13-17 has been healthy at 22%, with PAT CAGR higher at 58%, due to low base effect. In other words, while revenue has doubled between FY13 to FY17 from Rs. 21 crore to Rs. 46.7 crore, PAT has risen 6x, from Rs. 98 lakh to Rs. 6.17 crore in FY17. For 7 months ended 30 Oct 17, revenue and PAT stood at Rs. 23 crore and Rs. 2.6 crore respectively. Post 1:1 bonus given in Feb 2018, current equity stands expanded to Rs.7.05 crore (FV Rs. 10), leading to an EPS of Rs. 3.68 for 7MFY18 and Rs. 8.75 for FY17. As of 30-10-17, net worth is Rs. 33 crore and net debt at Rs. 18 crore.   

Positives:

1. Increasing Capital Work in Progress: Up from Rs. 2.3 crore on 31-3-17 to Rs. 5.1 crore as of 31-10-17 on an intangible assets of Rs. 5.7 crore, as of 31-10-17, which should add to meaningful revenue going forward. 
2. Reasonable Valuation - At Rs. 80 per share, company’s market cap and EV on listing will be Rs. 75 crore and Rs. 90 crore respectively. This leads to PE and EV/EBITDA multiples of 9x and 6x, based on FY18E, which are attractive, as peers are ruling in double digit valuation multiples. Given company’s lower scale of operations and limited product basket, this valuation appears reasonable.

Negatives:

1. Given its nature of products, revenue from Govt. approximately accounts for 71%. Hence, debtors are high, at 4.5 months outstanding as of 31-3-17 and 7.4 months, as of 30-10-17. But what raises one’s eyebrow is that, as of 30-10-17, Rs. 9.27 crore or 37% of debtors are due for over 6 months, but has not been provided for, as considered good by the company. Thus, working with Govt. bodies puts working capital under strain, and this company is no exception.
2. Concentrated revenue, wherein single product AutoDCR, accounting for over 50% of annual revenue, is pledged to SIDBI against Rs. 7 crore loan availed by the company. Ownership of trade mark and copyright to this product however rests with the promoter, in his personal name, and not with the company, which can be a bone of contention in the future.

Conclusion:

IT sector is coming back on investors’ radar and this company is a reasonable small cap stock available at single digit valuation multiple. Being a SME listing however, one cap apply small portion of one’s portfolio, with an investment view.

Disclosure: No interest.