Virtual Galaxy NSE SME IPO review (May apply)

•    The company is a digital solutions provider for BFSI segment with related products and services.
•    It posted average performance till FY23, but then it posted spectacular bottom lines that irks and raises concern over its sustainability.
•    Based on its super performance, the issue appears fully priced. 
•    It has orders on hand worth Rs. 47+ cr. as of December 31, 2024.
•    Well-informed investors may park funds for medium to long term.

ABOUT COMPANY:
Virtual Galaxy Infotech Ltd. (VGIL) is a SaaS product focused company engaged in providing core banking software solution, IT solutions, ERP implementation and customized software solutions development, IT services for the BFSI, ERP, and E-Governance domains. It is primarily involved in the development, customization, installation, and implementation of software applications, along with comprehensive post-implementation support, monitoring, and maintenance services for the delivered solutions. To provide a seamless experience to clients, VGIL offers a range of essential allied services, ensuring that all software needs are met under one roof. Its wide range of offerings covers services including consultation, architecture, solution design, implementation, monitoring and managed services.

Founded in 1997 in Nagpur, the Company has been delivering secure core banking solutions within a seamlessly integrated banking and financial ecosystem. Its flagship product, E-Banker is a core banking solution designed specifically for banks, societies, and NBFCs. It is available “on-premises with infrastructure” i.e., it offers the flexibility to the customer to deploy E-Banker on their own premises with customized infrastructure. Alternatively, it is also available as off-the-shelf banking software solution in a 'Software as a Service' (SaaS) model. 

This covers bundled solutions of software and hosting infrastructure on a rental basis for those preferring a hassle-free solution. In addition, it offers IBS-ERP, an ERP solution tailored for small and mid-sized enterprises, and e-APMC, an e-governance software developed for Agricultural Produce Market Committees (APMCs) and government organizations. Recently, it has expanded product portfolio with V-Pay, a comprehensive enterprise digital payment solution, V-SOC, E-Autopsy Software, VGST and LOS (Loan Origination System / Module). As of December 31, 2024, it had an order book worth Rs. 47.29 cr. Its BFSI segment contribution in its top line remained above 92% on an average for the reported periods. As of December 31, 2024, it had 329 employees on its payroll.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden book building route IPO of 6570000 equity shares of Rs. 10 each to mobilize Rs. 93.29 cr. at the upper cap. It has announced a price band of Rs. 135 – Rs. 142 per share. The issue opens for subscription on May 09, 2025, and will close on May 14, 2025. The minimum number of shares to be applied is for 1000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 26.42% of the post-IPO paid-up capital of the company. From the net proceeds of the IPO, the company will utilize Rs. 34.27 cr. for capex on additional development facility, Rs. 3.00 cr. for repayment/prepayment of certain borrowings, Rs. 5.05 cr. for investment in procuring GPU, Server and Storage System at data centre, Rs. 18.90 cr. for spending on enhancement, maintenance and upgradation of existing products, Rs. 14.06 cr. for business development and marketing activities, and the rest for general corporate purposes. 

The IPO is solely lead managed by Smart Horizon Capital Advisors Pvt. Ltd., and Maashitla Securities Pvt. Ltd., is the registrar to the issue. Alacrity Securities Ltd., is the Market Maker for the company. Shreni Shares Ltd. is a syndicate member.

Having issued initial equity shares at par value, the company issued further equity shares at a fixed price of Rs. 146 per share between May 2024 and June 2024. It has also issued bonus shares in the ratio of 19 for 1 in March 2010, 1 for 1 in August 2014, and 1 for 2 in June 2024. The average cost of acquisition of shares by the promoters is Rs. 3.11 per share. 

Post-IPO, company’s current paid-up equity capital of Rs. 18.30 cr.  will stand enhanced to Rs. 24.87 cr. Based on the upper price band of the IPO, the company is looking for a market cap of Rs. 353.14 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has (on a consolidated basis) posted a total income/net profit of Rs. 43.44 cr. / Rs. 0.40 cr. (FY22), Rs. 59.77 cr. / Rs. 0.72 cr. (FY23), and Rs. 63.58 cr. / Rs. 16.54 cr. (FY24). 

On a standalone basis, for the last three fiscals, it posted a total income/net profit of Rs. 42.73 cr. / Rs. 1.26 cr. (FY22), Rs. 58.56 cr. / Rs. 1.79 cr. (FY23), Rs. 61.52 cr. / Rs. 16.30 cr. (FY24). For 9M of FY25 ended on September 30, 2024, it earned a net profit of Rs. 27.42 cr. on a total income of Rs. 101.37 cr. Its total borrowings of Rs. 38.64 cr. as of March 31, 2024 raise concern. The sudden boost in its bottom lines from FY24 onwards (i.e., in pre-IPO periods) raises eyebrows and concern over its sustainability going forward. Its trade receivables (on a standalone basis) of Rs. 25.04 cr. (FY24) and 20.61 cr. (9M-FY25) remain at alarming level.

For the last three fiscals, the company has reported an average EPS of Rs. 5.43 (on a standalone basis) and Rs. 5.19 (on a consolidated basis), and an average RoNW of 23.26% (on a standalone basis) and 21.48% (on a consolidated basis). The issue is priced at a P/BV of 2.99 based on its NAV of Rs. 47.50 as of December 31, 2024, but its post-IPO NAV data is missing from offer document.

If we attribute FY25 annualized super earnings on post-IPO fully diluted equity capital, then the asking price is at a P/E of 9.66 (on a standalone basis). Based on FY24 earnings, the P/E stands at 21.65 (on a standalone basis) and 21.35 (on a consolidated basis). The issue relatively appears fully priced.

For the reported periods, the company has posted PAT margins of 2.97% (FY22), 3.07% (FY23), 26.52%, (FY24), 27.08% (9M-FY25) - (on a standalone basis), and 0.93%, 1.20%, 26.04%, (NA), (on a consolidated basis). Similarly, it marked RoCE margins of 9.43%, 11.30%, 30.53%, 33.39%,  - (on a standalone basis), and  7.71%, 9.95%, 31.68%, (NA) – (on a consolidated basis) respectively for the referred periods. It is highly surprising that it has not given its 9M-FY25 earnings data on a consolidated basis. 

DIVIDEND POLICY:
The company has not paid any dividends for the reported periods of the offer document. It will adopt a prudent dividend policy post listing, based on its financial performance and future prospects. 

COMPARISION WITH LISTED PEERS:
As per the offer document, the company has shown Veefin Solutions, Network People, Trust Fintech as their listed peers. They are currently trading at a P/E of 58.5, 85.9, and 18.0 (as of May 05, 2025). However, they are not truly comparable on an apple-to-apple basis.  These peers’ comparison appears to be an eyewash.

MERCHANT BANKER’S TRACK RECORD:
This is the 5th mandate from Smart Horizon in the last two fiscals including the ongoing one. From the last 4 listings so far, 1 opened at discount, 1 at par and the rest listed with a premium ranging from 6.67% to 90% on the listing date.