Sancode Techno BSE SME IPO review (Avoid)

•    STL is in IT software and related product developments. 
•    It has posted an average performance till FY22. 
•    Sudden boost in the bottom line for H1 of FY23 raised eyebrows and concern over sustainability.
•    Based on its financial track record so far, the issue appears aggressively priced. 
•    There is no harm in skipping this pricey issue. 

ABOUT COMPANY:
Sancode Technologies Ltd. (STL) is a software and product development company offering an API-enabled platform and solutions that enable organizations to adopt powerful technology applications addressing their strategic business needs rapidly. The company enables organizations to drive digital transformation and competitive differentiation by providing them easy to implement pre-built business logic and solution workflows, especially for finance automation.

STL is more focused on bridging the gap between technology and businesses by hiring a team of solution architects, project managers and business analysts. It delivers solutions to customers by working in collaboration with a network of implementation partners in the areas like -Digital transformation, Workflow automation, Artificial intelligence (AI) and Machine learning (ML), Robotic Process Automation (RPA) and Data Analytics, Metaverse and Web3 applications, and System Integration.

Besides the sale of software products, the company also generates revenue from annuity-based recurring fees/charges from SaaS, ATS/ATM-related services and support. As of September 30, 2022, it had 9 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden IPO of 1095000 equity shares of Rs. 10 each at a fixed price of Rs. 47 per share to mobilize Rs. 5.15 cr. The issue opens for subscription on March 31, 2023, and will close on April 06, 2023. The minimum application to be made is for 3000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. The issue constitutes 26.91% of the post-IPO paid-up capital of the company. STL is spending Rs. 0.44 cr. for this IPO process and from the net proceeds it will utilize Rs. 3.73 cr. for working capital, and Rs. 0.98 cr. for general corporate purposes. 

Shreni Shares Pvt. Ltd. is the lead manager as well as the market maker and Bigshare Services Pvt. Ltd. is the registrar of the issue. 

Having issued initial equity shares at par, the company issued further equity shares at a price of Rs. 494 per share between April 2017 and November 2022. It has also issued bonus shares in the ratio of 12 for 1 in November 2022. The average cost of acquisition of shares by the promoters is Rs. 0.04, Rs. 0.77, and Rs. 10.28 per share. 

Post-IPO, STL's current paid-up equity capital of Rs. 2.97 cr. will stand enhanced to Rs. 4.07 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 19.12 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, STL has posted a turnover/net profit - (loss) of Rs. 0.43 cr. / Rs. - (1.13) cr. (FY20), Rs. 1.60 cr. / Rs. - (0.26) cr. (FY21), and Rs. 2.45 cr. / Rs. 0.75 cr. (FY22). For H1 of FY23, it earned a net profit of Rs. 0.89 cr. on a turnover of Rs. 1.81 cr. Boost in the bottom line for the first half of FY23 appears to have as window dressing to get the fancy valuation. Its debtor holding days are at a worrisome level of 280 plus days. The sudden boost in its PAT margins too raises eyebrows and concern over the sustainability going forward.

For the last three fiscals, STL has reported an average EPS of Rs. 0.37 (??) and an average RoNW of 1.75%. The issue is priced at a P/BV of 3.80 based on its NAV of Rs. 12.36 as of September 30, 2022, and at a P/BV of 2.28 based on its post-IPO NAV of Rs. 20.60 per share. 

If we annualize FY23 earnings and attribute them to post-IPO fully paid-up equity capital, then the asking price is at a P/E of 10.71, whereas on the basis of FY22 earnings it is at a P/E of 25.41. Thus the issue appears aggressively priced. 

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. 

COMPARISON WITH LISTED PEERS:
As per the offer document, the company has no listed peers to compare with. 

MERCHANT BANKER'S TRACK RECORD:
This is the 20th mandate from Shreni Shares in the last three fiscals (including the ongoing one). Out of the last 10 listings, 1 opened at a discount and the rest were listed at premiums ranging from 4.29% to 101.18% on the listing date.