Updater Services Limited IPO: Adjusted P/E on Post-Money

Published on Monday, September 25, 2023 by Jyoti Maru

The adjusted Price to Earnings (P/E) of Updater Services Limited ("the Company" or "UDS") on post-money basis works out to just 25x as against the perception of the P/E ratio being at over 44x at the Cap Price of Rs. 300 per equity share (upper end of the IPO price band). The P/E of 44x of Updater Services Ltd. appeared to be higher than the highest Industry P/E of 40.96x (the lowest being 19.74x) and the industry composite of 29.69x.

However, consider the following information culled out from the RHP. The restated profit for the year FY23 was Rs. 34.6 crore as per the RHP (D). If you consider the adjustments mentioned in the RHP, the Employee Stock Option Expenses were Rs. 3.9 crore (J). Fair value changes in liability payable/paid to promoters of acquired subsidiary were Rs. 41.36 crore (K). Liability payable to promoters of acquired subsidiary no longer required to be written back (L) is Nil. In terms of valuation, the pre-money valuation works out to Rs. 1,600 crore while the post-money valuation works out to Rs. 2,000 crore. The adjusted PAT (D+J+K-L) works out to Rs. 79.9 crore. The adjusted P/E on post-money basis works out to 25x. If the adjustments made on account of the fair value changes are taken into consideration then the adjusted EBITDA will change and the adjusted value of the P/E will work out to be lower (than what can be seen due to INDAS).

Adjusted EBITDA works out to Rs. 145 crore (6.89%) and adjusted ROCE works out to 24.4%. Cash flow from operations were Rs. 114.8 crore in FY23 vis-a-vis Rs. 31.1 crore in FY22 and Rs. 128.5 crore in FY21.

UDS is one of the largest integrated business services provider in India and the second largest player in the integrated facility management business (IFM), It is among Top 3 player in multiple high margin business support services segments (BSS). It is No. 1 in Sales Enablement segment - Customers include Microsoft, Saint-Gobain, Hindustan Unilever Limited, Vivo Mobile among others. It is No. 1 in Audit & Assurance - Key Customers: P&G, ABFRL, Hershey and More Retail, etc. It is No. 3 in Employee Background verification - Customers include TCS, Persistent systems etc. It is No. 1 in Mailroom Management business for enterprises.

UDS entered the large airport ground handling segment recently. It handled a total of 2,258 scheduled aircraft across five airports including the airports at Pune and Patna, among others.

UDS is a clear transformation from low margin IFM business to high margin BSS segments. BSS revenue contribution has transformed from sub 10% in FY20 to ~30% in FY23; BSS segmental profit accounts for around 60% contribution in FY23.

UDS has PAN India presence at over 4,500 customer locations across India with a workforce of 65,000+ employees.

UDS has robust corporate governance track record with the Big Four auditors for over 10 years. It has been associated with several PEs right from New Vernon fund in 2006 to ICICI Venture (2008 - 2016) & now Motilal Oswal PE (MOPE) since 2017.

UDS has a track record of multiple acquisition, integration & quick turn-around. It has made highly capital efficient acquisitions --- total of 4 acquisition in last 4 years through internal accruals/debt. There was no equity dilution since MOPE investment 6 years back (2017); and the current net debt is around Rs. 11 crore.

Matrix was acquired in FY20 when its revenue was Rs. 76 crore & an EBITDA of 16% (Rs. 12 crore) which grew to around Rs. 124 cr in revenues with 27% EBITDA of Rs. 33 crore in FY23.

Denave was acquired in FY22 when its revenue was Rs. 265 cr & an EBITDA of Rs. 17 crore which grew to around Rs. 364 crore in revenues with an EBITDA of Rs. 34 crore in FY23.

UDS has low capex & high cashflow generation business - EBITDA to Net Cash Flow from Operations over 75%, from Rs. 145 crore adjusted EBITDA to over Rs. 115 cr CFO in FY23. It is a high ROCE business - ~25% ROCE (FY23).

UDS has highly experienced & professional management team including founders of acquired entities being part of the board.

Considering all the above, the anchor investor subscription for the IPO was robust. 18 anchor investors were allotted 96 lakh equity shares and UDS raised ₹288 crore ahead of company's proposed IPO at the upper price band of ₹300 per equity share (including premium of ₹290 per equity shares) with face value of ₹10 per share.

Anchor Book included marquee Domestic Institutional Investors such as ICICI Prudential, BNP Paribas, Aditya Birla Sunlife, Motilal Oswal etc and Foreign Institutional Investors such as Copthall Mauritius, Franklin India, Societe Generale, CitiGroup Global Market and Nomura Singapore.

Updater Services will open its Public Issue Bid/Offer in relation to its initial public offering of Equity Shares on Monday, September 25, 2023. The Offer comprises of a fresh issue of Equity Shares aggregating up to ₹400 crore ("Fresh Issue") and an offer for sale up to 80 lakh Equity Shares by selling shareholders (the "Offer for Sale" and together with the Fresh Issue, the "Offer").

The Anchor Investor Bidding Date shall be Friday, September 22, 2023. The Bid/Offer will open on Monday, September 25, 2023 for subscription and will close on Wednesday, September 27, 2023.

The Price Band of the Offer has been fixed at ₹280 to ₹300 per Equity Share. Bids can be made for a minimum of 50 Equity Shares and in multiples of 50 Equity Shares thereafter.

The Company, as part of the Objects of the Offer, proposes to utilize the Net Proceeds raised through the Fresh Issue towards Repayment and /or prepayment of certain of its outstanding borrowings, amounting to ₹133 crore. Further, the Company intends to utilize ₹80 crore from the Net Proceeds towards pursuing unidentified inorganic initiatives, ₹115 crore from the Net Proceeds towards funding its working capital requirements and the balance amount from the Net Proceeds towards general corporate purposes.

The Offer for Sale comprises of up to 4,000,000 Equity Shares by Tangi Facility Solutions Private Limited (The Promoter Selling Shareholder), up to 800,000 Equity Shares by India Business Excellence Fund-II and 3,200,000 Equity Shares by India Business Excellence Fund-IIA ("Other Selling Shareholders").

The Equity Shares offered through the Red Herring Prospectus dated September 18, 2023 are proposed to be listed on BSE Limited ("BSE") and the National Stock Exchange of India Limited ("NSE"). For the purposes of the Offer, BSE is the Designated Stock Exchange.

IIFL Securities Limited, Motilal Oswal Investment Advisors Limited and SBI Capital Markets Limited are the book running lead managers ("BRLMs") to the Offer.