Olatech Solutions BSE SME IPO review (Avoid)

•    OSL is engaged in IT-related services and solutions. 
•    It has posted declining trends for its top line for the last three fiscals. 
•    Super earnings for FY22 appear to be window dressing.
•    The issue is fully priced based on super earnings of the latest fiscal. 
•    There is no harm in skipping this IPO which is fully arranged.

ABOUT COMPANY:
Olatech Solutions Ltd. (OSL) is engaged in the business of Data Centre, Enterprise, Telecom and IT Software solutions in the OSS - BSS (Operations Support System and Business Support System) segment. It provides software solutions and transformation services (System Integration) to clients and has deployed its software solutions at various institutions in India and other regions also. Through a wide range of offerings across verticals, it possesses capabilities spanning the lifecycle of services ranging from consultation, architecture, solution design, and implementation to monitoring and providing managed services. 

OSL's software solutions are offered under the registered trademark "Epiphany". Key offerings include software solutions such as NOC tools, Network monitoring, management & analytics, secured authentication and accounting of users & devices, Data Centre Infrastructure Management etc. It has gained experience by collaborating with clients across verticals such as Telcos, ISPs, Enterprises, Data Centre Service Providers, Public Sector to create a foundation for the evolution of offerings across the verticals. As of March 31, 2022, OSL has around 10 employees on the payroll.

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its needs for working capital (Rs. 0.88 cr.), general corporate purposes (Rs. 0.45 cr.), OSL is coming out with a maiden IPO of 700000 equity shares of Rs. 10 each at a fixed price of Rs. 27 per share to mobilize Rs. 1.89 cr. The issue opens for subscription on August 12, 2022, and will close on August 19, 2022. Minimum application is to be made for 4000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. The issue constitutes 29.91% of the post-IPO paid-up capital of the company. OSL is spending Rs. 0.56 cr. for this IPO process. This indicates the structured nature of this IPO with funding arrangements.

The issue is solely lead managed by Shreni Shares Pvt. Ltd., Skyline Financial Services Pvt. Ltd. is the registrar to the issue.  Shreni Shares Pvt. Ltd. is also a market maker for this IPO. 

The company has issued entire equity at par and has also issued bonus shares in the ratio of 163 for 1 in March 2022. The average cost of acquisition of shares by the promoters is Rs. 0.06 per share. 

Post-IPO, OSL's current paid-up equity capital of Rs. 1.64 cr. will stand enhanced to Rs. 2.34 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 6.32 cr. 

FINANCIAL PERFORMANCE: 
On the financial performance front, for the last three fiscals, OSL has posted turnover/net profits of Rs. 8.35 cr. / Rs. 0.52 cr. (FY20), Rs. 5.49 cr. / Rs. 0.12 cr. (FY21) and Rs. 2.62 cr. / Rs. 0.35 cr. (FY22). While its top line has marked declining trends, its bottom line posted inconsistency. A higher net on lower turnover for FY22 indicates window dressing. The sustainability of such performance going forward is a major concern.  

For the last three fiscals, OSL has reported an average EPS of Rs. 1.84 and an average RoNW of 21.09%. The issue is priced at a P/BV of 2.69 based on its NAV of Rs. 10.02 as of March 2022. The documents are silent on their post-IPO NAV data. 

If we attribute FY22 higher earnings on post IPO fully diluted paid-up equity capital, then the asking price is at a P/E of around 18 making it a fully priced IPO with concern over the sustainability of margins reported. 

COMPARISON WITH LISTED PEERS:
As per the offer document, OSL has shown Sterlite Technologies and Megasoft Ltd as its listed peers. They are currently trading at a P/E of 00 and 125.44 (as of August 08, 2022). They are not truly comparable on an apple-to-apple basis. 

DIVIDEND POLICY:
The company has not declared any dividends since incorporation. It will adopt a prudent dividend policy post listing based on its financial performance and future prospects. 

MERCHANT BANKER'S TRACK RECORDS:
This is the 12th mandate from Shreni Shares in the last three fiscals (including the ongoing one). Out of the last 10 listings, 1 opened at par and the rest with premiums ranging from 0.6% to 59.73% on the day of listings.