TAC Infosec NSE SME IPO review (Apply)

•    TIL is engaged in the business of providing risk-based vulnerability management and assessment solutions coupled with cybersecurity related services.
•    It marked sudden boost in its top and bottom lines from FY23 onwards.
•    Super earnings for FY23 raise eyebrows and concern over its sustainability.
•    Based on FY24 annualized earnings, the issue appears fully priced. 
•    Investors may park funds for the medium to long term rewards.

ABOUT COMPANY:
TAC Infosec Ltd. (TIL) is engaged in the business of providing risk-based vulnerability management and assessment solutions, cybersecurity quantification and services of Penetration testing to organizations of any scale, size, and business through "SaaS model". The company offers security software products and solutions both in India and internationally. Its end customers are Banks and financial Institutions, government regulatory bodies and departments, large-scale enterprises (including business offices) like HDFC, Bandhan Bank, BSE, National Payments Corporation of India, DSP investment Managers Private Limited, Motilal Oswal Financial Services Limited and NSDL e-Governance. 

TIL's flagship software product is ESOF (Enterprise Security in One Framework) which was launched in 2018. ESOF is a vulnerability management platform consisting of various product portfolio namely ESOF Appsec, ESOF VMP, ESOF VACA, ESOF PCI ASV, ESOF CRQ. All the products launched under ESOF Platform have wide range of applications ranging from vulnerability management solutions for web and application-based data, compliance assessment, and cyber risk quantification.

Vulnerability Management is the continuous process of identifying, assessing, prioritizing, mitigating, and remediating the vulnerabilities across the complete Information Technology infrastructure of the organization. Cybersecurity of the organizations needs to be monitored in real-time and remediated as soon as possible to avoid attacks, this activity is often overseen by organizations through vulnerability management tools or products. While, Risk-Based Vulnerability Management (RBVM) is the process of prioritizing vulnerabilities for remediation based on the level of risk each vulnerability discovered, poses to one's organization and IT Infrastructure. The RBVM method allows the organization to prioritize their vulnerabilities discovered on the basis of the severity, making it time and cost-effective while having a concrete cybersecurity process in place.

ESOF offers a robust vulnerability assessment mechanism that scans and identifies potential security loopholes within the IT infrastructure and along with configuration assessment, it ensures that IT systems are not only free from vulnerabilities but also configured optimally to resist potential threats. Also, ESOF's auto-prioritization feature utilizes advanced algorithms to rank vulnerabilities based on their severity, potential impact, and exploitability, ensuring that critical issues are addressed promptly. Apart from above, ESOF also provides Asset Tiering, Business Unit Regrouping and Cyber score services. These services, coupled with risk quantification, provide senior management and board members with a well-informed and strategically planned approach to navigating the challenges and opportunities within their organizations. ESOF platform is more than just a vulnerability management tool as it provides comprehensive framework that empowers organizations to navigate the complex cybersecurity landscape.

While its top 5 customers are contributing around 90%, top 10 customers have contributed up to 96% of its revenues for the last 18 months' turnover. As of September 30, 2023, it had 56 employees on its payroll.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden book building route IPO of 2829600 equity shares of Rs. 10 each to mobilize Rs. 29.99 cr. at the upper cap. It has announced a price band of Rs. 100 - Rs. 106 per share. The issue opens for subscription on March 27, 2024, and will close on April 02, 2024. The minimum application to be made is for 1200 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 27% of the post-IPO paid-up capital of the company. From the net proceeds of the IPO, it will utilize Rs. 0.00 cr. for acquisition of TAC Security Inc. (Delaware, USA) and making it wholly owned subsidiary, Rs. 18.65 cr. for investment in human resources and product development, and the rest for general corporate purposes. 

The issue is solely lead managed by Beeline Capital Advisors Pvt. Ltd., and Skyline Financial Services Pvt. Ltd. is the registrar of the issue. Beeline Group's Spread X Securities Pvt. Ltd. is the market maker for the company. 

After issuing initial equity share at par value, the company issued further equity shares at a fixed price of Rs. 1800 per share between November 2016 and June 2017. It has also issued bonus shares in the ratio of 35 for 1 in August 2018, and 16 for 1 in January 2024. The average cost of acquisition of shares by the promoters is Rs. 0.02 per share. 

Post-IPO, company's current paid-up equity capital of Rs. 7.65 cr. will stand enhanced to Rs. 10.48 cr. Based on the upper IPO price band, the company is looking for a market cap of Rs. 111.08 cr.  

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has posted a total revenue/net profit of Rs. 5.16 cr. / Rs. 0.61 cr. (FY21), Rs. 5.24cr. / Rs.  0.61 cr. (FY22), and Rs. 10.14 cr. / Rs. 5.07 cr. l(FY23). For H1 of FY24 ended on September 30, 2023, it earned a net profit of Rs. 1.95 cr. on a total revenue of Rs. 5.31 cr. The sudden boost in its top line and gigantic surge in bottom line for FY23 not only raise eyebrows, but also concern for sustainability of such margins going forward.

For the last three fiscals, it has reported an average EPS of Rs. 2.74, and an average RONW of 45.88%. The issue is priced at a P/BV of 8.42 based on its NAV of Rs. 12.59 as of September 30, 2023, and at a P/BV of .88 based on its post-IPO NAV of Rs. 120.82 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 28.50 

For the reported periods, the company has posted PAT margins of 12.12% (FY21), 11.89% (FY22), 50.73% (FY23), 38.81% (H1-FY24), and RoCE margins of 47.38%, 33.23%, 89.82%, 22.75% respectively for the referred periods. 

DIVIDEND POLICY:
The company has not declared any dividends for the reported periods of the offer document. 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 Dev Info, Infobeans Techno, and Sigma Solve as their listed peers. They are trading at a P/E of 26.4, 51.5, and 24.1 (as of March 22, 2024. However, they are not comparable on an apple-to-apple basis.

MERCHANT BANKER'S TRACK RECORD:
This is the 34th mandate from Beeline Capital in the last three fiscals, out of the last 10 listings, all opened with a premiums ranging from 7.14% to 200% on the day of listing.