Esconet Techno NSE SME IPO review (May apply)

•    ETL is engaged in all sort of IT requirements and related solutions.
•    The company marked growth in its top and bottom lines, but posted bumper profits from FY23 onwards.
•    Based on FY24 annualized super earnings, the issue appears fully priced.
•    Well-informed investors may apply for medium to long term rewards.
 
ABOUT COMPANY:
Esconet Technologies Ltd. (ETL) is engaged in the business of meeting a wide range of IT requirements such as high-performance supercomputing solutions, data centre facilities, encompassing storage servers, network security, virtualization, and data protection. Its comprehensive solutions cater to the needs of SMEs, large enterprises, and public sector clients. Furthermore, Esconet extend its capabilities into the cloud services domain through its wholly owned subsidiary, ZeaCloud Services, ensuring that clients have access to cutting-edge technology and a seamless IT infrastructure experience.

Throughout this journey, Esconet has garnered not only experience but also the pool of clientele base of private and public sector organizations mentioned below. This positive evolution showcases ETL's commitment to excellence, innovation, and comprehensive client support. As a trusted partner, it is delivering not just solutions, but tailored strategies that empower its clients to thrive in the rapidly evolving landscape of technology.

Recognizing the demand in the Indian market, Esconet introduced its brand, HexaData, specializing in high-performance Servers, Workstations, and storage systems. Additionally, ETL's strategic collaboration with NVIDIA has resulted its growth in the Artificial Intelligence (AI) and Machine Learning (ML) domain, enhancing its servers and workstations. In 2022, with a view to expand the services horizon, ETL established ZeaCloud Services Private Limited (Hereinafter refer as "ZeaCloud Services") and later on in 2023 acquired ZeaCloud Services through a Share Swap arrangement as a wholly owned subsidiary. 

ZeaCloud Services, specializes in providing a comprehensive range of cloud-based services through their brand name Availablous to meet various business needs such as disaster recovery services, managed cloud services, private cloud, DaaS services. ETL provides a robust suit server solution meticulously crafted to cater to the diverse and evolving needs of enterprises. These solutions encompass cutting-edge hardware configurations, seamless networking, and secure storage options, providing a reliable foundation for businesses to build upon. In stride with the data-driven era, the company goes beyond conventional server services and integrates systematic machine learning tools and artificial intelligence into its portfolio. ETL provides a wide range of System Integration services that involves total IT solutions including hardware, network and software implementations. As of November 30, 2023, it had 47 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden book building route IPO of 3360000 equity shares of Rs. 10 each (worth Rs. 28.22 cr. at the upper cap) It has announced a price band of Rs. 80.00 - Rs. 84 per share. The issue opens for subscription on February 16, 2024, and will close on February 20, 2024. The minimum application to be made is for 1600 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 27.18% of the post-IPO paid-up capital of the company. From the net proceeds of the IPO funds, it will utilize Rs. 16.00 cr. for working capital, Rs. 2.50 cr. for investment in wholly owned subsidiary i.e. Zeacloud Services Pvt. Ltd., and the rest general corporate purposes. 

The issue is solely lead managed by Corporate Capitalventures Pvt. Ltd., and Skyline Financial Services Pvt. Ltd. is the registrar of the issue. SS Corporate Securities Ltd. is the market maker for the company. 

Having issued/converted initial equity capital at par the company issued further equity in the price range of Rs. 29.20 - Rs. 321 per share between March 212 and November 2023. The company has also issued bonus shares in the ratio of 10 for 1 in November 2023. The average cost of acquisition of shares by the promoters is Rs. 0.91, Rs. 0.99, and Rs. 29.18 per share.

Post-IPO, company's current paid-up equity capital of Rs. 9.00 cr. will stand enhanced to Rs. 12.36 cr. Based on the upper IPO price band, the company is looking for a market cap of Rs. 103.82 cr.  

FINANCIAL PERFORMANCE:
On the financial performance front, for the last fiscal, the company has (on a consolidated basis) posted a total income/net profit of Rs. 96.91 cr. / Rs. 3.18 cr. (FY23) and for 6M of FY24 ended on September 30, 2023, it earns a net profit of Rs. 3.05 cr. on a total revenue of Rs. 71.47 cr. 

On a standalone basis, for the last three fiscals, the company reported a total income/net profit/ -(loss) of Rs. 44.20 cr. / Rs. - (1.01) cr. (FAY21), Rs. 68.59 cr. / Rs. 0.72 cr. (FY22), and Rs. 94.98 cr. / Rs. 3.04 cr. (FY23). For H1 of FY24 ended on September 30, 2023, it earned a net profit of Rs. 3.04 cr. on a total income of Rs. 71.33 cr. The sudden boost in bottom lines from FY23 onwards raise eyebrows and concern over its sustainability. 

For the last three fiscals, it has reported an average EPS of Rs. 20.77, and an average RONW of 27.64%. The issue is priced at a P/BV of 7.32 based on its NAV of Rs. 11.47 as of November 30, 2023, and at a P/BV of 2.69 based on post-IPO NAV of Rs. 31.19 per share (at the upper cap).
 
If we attribute annualized FY24 earnings to its post-IPO fully diluted paid-p capital, then the asking price is at a P/E of 17.00. Thus the issue appears fully priced.

For the reported periods, the company has posted PAT margins of - (2.28) % (FY21), 1.06% (FY22), 3.21% (FY23), 4.28% (H1-FY24).

DIVIDEND POLICY:
The company has not declared any dividends for any financial year so far. It will adopt a prudent dividend policy based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per the offer document, the company has shown E2E Network and Netweb Techno as their listed peers. They are trading at a P/E of 65.2, and 138 (as of February 14, 2024). However, they are not comparable on an apple-to-apple basis.  

MERCHANT BANKER'S TRACK RECORD:
This is the 11th mandate from Corporate CapitalVenture in the last three fiscals, out of the last 10 listings, 2 opened at discount, and the rest with premiums ranging from 17.65% to 231.63% on the date of listing.