Varanium Cloud NSE SME IPO review (May apply)

•    VCL claims to be a fast-growing Indian Technology company. 
•    From a loss for FY20 to bumper profits in FY22 raises eyebrows.
•    Based on its financial performance so far, the issue is fully priced. 
•    It operates in a highly competitive segment with many big players.
•    Well-informed/risk seeker may consider investment for the medium to long term. 

ABOUT COMPANY:
Varanium Cloud Ltd. (VCL) is a fast-growing Indian technology company that is focused on providing services surrounding digital audio, video, and financial blockchain (for PayFac) based streaming services. The Company operates in the following key verticals:

o    Provision of digital audio and video content streaming services to various content owners and telecom operators in India and internationally on a SaaS (Software As A Service) model such as Voice & Video over Internet Protocol solutions (VoIP) in the B2B and B2C segments;
o    Online payment facilitation services (PayFac);
o    Provision of low bandwidth digital education content platforms (EdTech) with complete Learning Management Systems (LMS) focused on non-urban areas under Edmission brand;
o    Provision of information technology-related services to start-ups and SMEs to help them transition their business to digital platforms and manage the relevant infrastructure on an IaaS (Infrastructure As A Service) model;

As of June 30, 2022, it had 19 employees on its payroll. 

VCL operates in a competitive market and competition is based primarily on the quality of service, and pricing of such products and services. To remain competitive in the market it strives to improve design capability, reduce procurement costs and improve operating efficiencies.

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its need for setting up of 3 nos. of Containerized Edge Data Centres Rs. 23.40 cr.), the rollout of three Edmission Flagship Digital Learning Centres (Rs. 8.40 cr.), and general corporate purposes (Rs. 8.59 cr., VCL is coming out with a maiden IPO of 3000000 equity shares of Rs. 10 each at a fixed price of Rs. 122 per share to mobilize Rs. 36.60 cr. The issue opens for subscription on September 16, 2022, and will close on September 20, 2022. The minimum application is to be made for 1000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 29.85% of the post-issue paid-up capital of the company. VCL is spending Rs. 3.14 cr. for this IPO indicating a structured process.  

The company has already raised Rs. 6.93 cr. through pre-IPO placement between July 2022 to September 2022, at a price of Rs. 99 per share. Surprisingly, it has reserved 486000 shares (i.e. 16.2%) for the market maker. 

The issue is solely lead managed by First Overseas Capital Ltd. and Bigshare Services Pvt. Ltd. is the registrar to the issue. Rikhav Securities Ltd. is the market maker and has underwritten 83.33% of the issue. 

Having issued/converted initial equity shares at par, the company issued further equity shares under pre-IPO placement at Rs. 99 per share between July 2022, to September 2022.  The average cost of acquisition of shares by the promoters is Rs. 10.00 per share. 

Post this issue, VCL's current paid-up equity capital of Rs. 7.05 cr. will stand enhanced to Rs. 10.05 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 122.63 cr.

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has reported turnover/net profits - (loss) of Rs. 0.12 cr. / Rs. - (1.49) cr. (FY20), Rs. 4.20 cr. / Rs. 2.89 cr. (FY21), and Rs. 35.35 cr. / Rs. 8.40 cr. (FY22). The sudden boost in its working for FY22 raises eyebrows. 

For the last three fiscals, the company has posted an average EPS of Rs. 7.39 and an average RoNW of 28.83%. The issue is priced at a P/BV of 5.12 based on its NAV of Rs. 23.81 as of March 31, 2022, and at a P/BV of 2.04 based on its post-issue NAV of Rs. 59.96 per share. 

If we attribute FY22 earnings to post IPO fully diluted equity base, then the asking price is at a P/E of 14.59, and based on its last three fiscals average EPS P/E stands at 16.51. Thus issue appears fully priced. 

COMPARISON WITH LISTED PEERS:
As per offer documents, VCL has shown Info Edge, Infibeam Avenues, Tanla Platforms, and Route Mobile as its listed peers. They are currently trading at a P/E of 104.07, 53.06, 108.19, and 186.06 (as of September 12, 2022). However, they are not truly comparable on an apple-to-apple basis. 

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

MERCHANT BANKER'S TRACK RECORD:
This is the 11th mandate from First Overseas in the last four fiscals (including the ongoing one). Out of the last 9 listings, 1 opened at discount, 3 opened at par and the rest with premiums ranging from 1.40% to 120% on the day of listing.