DC Infotech NSE SME IPO review (May apply)

•    DCIC is an IT solution distribution house having a good network
•    The company follows a B2B and B2C business model to capture more market share.
•    The company is in a high volume less margin business.
•    Post-IPO its high debt-equity ratio will decline from 4.85 to 1.37.  
•    Though issue pricing appears reasonable based on FY20 Q1 earnings, sustainability is a major concern.

 ABOUT COMPANY:
DC Infotech & Communications Ltd. (DCIC) started its journey from a distribution-based business. However, over a period of time, it diversified from distribution-based business to Value-Added Distribution of Information Technology products, Networking, Security, surveillance, wireless, broadband, digital signage, firewall's, desktop virtualization, power solutions and other solutions like network performance, digital performance, cloud security, enterprise security, etc.

DCIC is an IT Solution distribution house in India that has commenced its operations with reselling and redistribution of IT hardware products like Cabinets, motherboard, etc. Engaged in the distribution business, the company has partnered with several networking and security brands for distribution in the country.

Currently, it operates with a dealer network of around 1600 dealers and through sales representatives. DCIC plays the role of an IT Distributor offering the bouquet of services. It acts as the link between the IT manufacturers/developers and end-users and other resellers. The Company is in the distribution business of hardware and software IT products which is a high-volume business, where the efficient management of stock plays a vital role and helps it to manage the complete supply chain right from the manufacturers and end-users. DCIC follows the B2B and B2C business model to provide complete Information Technology solutions and support to channel partners. The focus is to capture a considerable market share in each of the product categories. DCIC is distributing products of Brands/Vendors like Netgear, D-Link, ZScaler, Samsung, Aten, Avnet, Netscout, Riverbed, Delta Power, Sonicwall, Cisco, Moxa, Barracuda, Ncomputing, etc.  DCIC's clients include BPCL, Cosmos Bank, Hathway, L&T Fin., Syngenta, Nilkamal, IIT-Bombay, etc.

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its needs for working capital (Rs. 7.65 cr.) and general corpus fund (Rs. 2.65 cr.) DCIC is coming out with a maiden IPO of 2400000 equity shares of Rs. 10 each at a fixed price of Rs. 45 per share to mobilize Rs. 10.80 cr. The issue opens for subscription on 12.12.19 and will close on 18.12.19. The minimum application is to be made for 3000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 40% of the post issue paid-up capital of the company. DCIC is spending Rs. 0.50 cr. for the entire proceeds of this IPO.

The issue is solely lead managed by Fedex Securities Pvt. Ltd. and Satellite Corporate Services Pvt. Ltd. is the registrar to the issue. Rikhav Securities Ltd. is the market maker for this issue. DCIC has converted entire current equity at par value. The average cost of acquisition of shares by the promoters is Rs. NIL per share. Post issue, DCIC's paid-up capital will stand enhanced from Rs. 3.60 cr. to Rs. 6.00 cr. Thus company mulls market capitalization of Rs. 27 cr.

FINANCIAL PERFORMANCE:
For the last three fiscals, DCIC has posted turnover/net profits of Rs. 108.79 cr. / Rs. 0.90 cr. (FY17), Rs. 97.56 cr. / Rs. 1.30 cr. (FY18) and Rs. 114.07 cr. / Rs. 1.34 cr. (FY19). For Q1 of FY20, it has clocked in the net profit of Rs. 0.91 cr. on a turnover of Rs. 36.49 cr. DCIC's top line has shown inconsistency. Its paid-up equity capital of Rs. 11.41 cr. as on 18.02.19 got reduced to Rs. 3.60 cr. as on 31.03.19 as per the scheme of MoA for the conversion of a partnership firm. (FY19 financial figures are combined for partnership firm up to 18.02.19 and as a limited company from 19.02.19 to 31.03.19). TheA sudden spurt in the bottom line since it became a limited company is a bit surprising.

For the last three fiscals, DCIC has posted an average EPS of Rs. 3.48 and an average RoNW of 9.42%. The issue is priced at a P/BV of 3.15 based on its NAV of Rs. 14.28 as on 30.06.19 (as per restated financial data) and at a P/BV of 1.02 based on post-IPO NAV of Rs. 44.08. DCIC has not paid any dividends so far. Its current high debt-equity ratio of 4.85 will come down to 1.37 post issue.

If we annualize FY20 Q1 earnings and attribute it to post issue paid-up equity capital then asking price is at a P/E of 7.4 against the industry average of 18.59.

COMPARISION WITH LISTED PEERS:
As per offer documents, DCIC has shown Creative Peripherals and Redington India as its listed peers. They are currently trading at a P/E of 11.77 and 15.56 (as on 06.12.19). However, they are not strictly comparable.

MERCHANT BANKER'S TRACK RECORD:
On merchant banker's front, this is the 10th mandate from its stable in the last three fiscals (including the ongoing). Out of the last 9 listings, one issue opened at a discount, one at par and the rest with a premium ranging from 0.16% to 56.52% on the day of listings.