Tracxn Technologies

IPO Size: Rs. 309 cr - entirely Offer For Sale (OFS)

• 60% of OFS is by PE funds Elevation Capital (halving 20% stake), Accel and Sequoia (completely exiting 4% and 2% stake). Angel investors Nandan Nilekani Family Trust, Flipkart founders Sachin and Binny Bansal are also fully exiting their 0.6%, 1.2% and 1.2% holding respectively.
• 40% of OFS is by the promoters (48% stake to drop to 36%), liquidating 30% of their holding. Even company’s CFO is selling 1/3rd of his holding.

Price band: Rs. 75-80 per share

M cap: Rs. 800 cr, implying a massive 39% dilution

IPO Date: Mon 10^th Oct to Wed 12^th Oct 2022, Listing Thu 20^th Oct 2022

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

Seven Reasons Why Caution is Advised:

1. Tracxn is a Software as a service (Saas) company, providing data platform of 1.8 million private companies to investment banks, PE funds, global corporates etc. Even after 8 years of operations, it is loss making even in FY22, with break even achieved just before IPO in Q1FY23.  
2. Company’s size can be termed as that of an SME, with FY22 topline at mere Rs. 63 cr. Infact company’s scale of operations is so small that even financial data in IPO document is presented in thousands and not lakhs or millions.
3. Besides a limited market size, business opportunity is not very large, as it has only 1,139 customers, that too spread globally! Thus, scaling up business remains a challenge, in the absence of which, operating leverage does not kick in for a Saas business.
4. Employees are company’s biggest resource (and the highest cost structure), but past attrition rate of 40% is eye-popping.
5. In FY22, IPO expenses of Rs. Rs. 4.5 cr were incorrectly charged to company’s books even when it is a 100% OFS and these expenses are to be borne by the selling shareholders.
6. Full exists by many shareholders raises doubt on growth prospects, especially the near-to-medium term. Post listing promoter holding of 36% leaves little skin-in-the-game.
7. Rs. 800 cr valuation unjustified for Q1FY23 PAT of Rs. 84 lakh. If you still wish to know why, read on:

1. Tracxn’s current operating costs, mostly fixed in nature, are approximately Rs. 68-75 cr per annum. Current revenue run rate stands at Rs. 75 cr, leading to break-even in Q1FY23. If revenue grows by 20% and assuming cost remain constant, expected profit is ~Rs. 13 cr. Applying 20% growth for FY24E, on projected PAT of Rs. Rs. 16 cr, one year forward PE multiple works out to 50x, which is grossly overpriced.
   1. CDSL and CAMS are non-discretionary duopoly businesses, which can partly justify their premium multiples of 42-44x, which is anyways lower in an absolute terms.
   2. Even other asset-light financial services businesses, like discount broker and asset management company, do not enjoy such high multiples.
   3. Company’s presence is limited to private market, which is 1/10^th the size of listed space. Small market opportunity is a big valuation dampener.  
2. Globally, valuation multiples for SaaS companies like Salesforce, Freshworks, Snowflake etc. have contracted sharply, on fear of US slowdown. Recession will impact both deal volumes and valuation levels, which will directly impact company’s revenue growth, as 70% revenue is from international geographies, pushing back breakeven.

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