DU Digital NSE SME IPO review (Avoid)

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Review By Dilip Davda on August 10, 2021

•    DDTL is engaged in providing Visa Processing services to few embassies.  
•    It has posted poor financial data for the last three fiscals.
•    Considering IPO expenses, the issue is fully structured.
•    The issue is exorbitantly priced and the asking price does not match its performance.
•    One can avoid this highly-priced offer that might take a long time for migration to the mainboard.

ABOUT COMPANY:
DU Digital Technologies Ltd. (DDTL) is in the business of providing Visa Processing Services to embassies of various countries. It manages the human interface between the visa applicant and the technical visa processing unit of the embassy of the country for which the company is awarded the contract or subcontract. The company's role is administrative and non-judgmental tasks related to visa application, digitalization, document verification and biometric data collection for its customers.

This in turn enables the respective government authorities to focus entirely on the critical task of assessment. DU Digital does not play any part in the decision-making process behind visa approvals being granted or denied. Currently, it is providing a human interface of visa processing services for Greece and Malaysia in and for India by way of various sub-contracts awarded to the group.

The services under these contracts include i) Accepting documents on behalf of the Ministry and facilitate the Ministry. ii) Attestation services iii) Collection of fingerprints, facial photos, retina scans, etc. with/without passport processing. Along with this DDTL also offers Value Added Services (VAS) to support applicants. These include but are not limited to Premium Lounge, Primetime application, Mobile Biometrics, Form Filling, SMS alert, Courier services etc.

The current outbreak of the COVID-19 pandemic has adversely impacted the global economy. The World Health Organization declared the outbreak of COVID-19 as a public health emergency of international concern on January 30, 2020, and a pandemic on March 11, 2020. The Government of India announced a nationwide lockdown on March 24, 2020, and imposed several restrictions. In view of the nationwide lockdown announced by the Government of India to control the spread of COVID19, DDTL's business operations were temporarily disrupted/slowed down from March 24, 2020. Further, since the national borders across the globe were closed and travelling between different countries almost ceased, the visa processing activities slowed down to a large extent. Though the company has resumed its operations in a phased manner, it is still facing uncertainty due to starting of the second and third waves. As of March 31, 2021, it had around 29 employees on its roll.

DDTL is doing all efforts to expand its customer base and arrangements with other companies that are outsourcing such services in and around the Indian continent.

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its needs for working capital (Rs. 1.52 cr.), investment in the subsidiary company (Rs. 1.40 cr.) and general corpus funds (Rs. 1.10 cr.), DDTL is coming out with a maiden IPO of 690000 equity share of Rs. 10 each with a fixed price of Rs. 65 per share to mobilize Rs. 4.49 cr. The issue opens for subscription on August 12, 2021, and will close on August 17, 2021. Minimum application is to be made for 2000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 26.54% of the post issue paid-up capital of the company. DDTL will be spending Rs. 0.47 cr. for the entire IPO process. This indicates that the issue is pre-sold i.e. it's a structured issue.

The issue is solely lead managed by Hem Securities Ltd. and Bigshare Services Pvt. Ltd. is the registrar to the issue. Hem Finlease Pvt. Ltd. is acting as a market maker for the issue.

The company has issued entire equity at par and has also issued bonus shares in the ratio of 140 for 1 share in June 2021. The average cost of acquisition of shares by the promoters is Rs. 0.07 per share.

Post issue, DDTL's current paid-up equity capital of Rs. 1.91 cr. will stand enhanced to Rs. 2.60 cr. At the IPO price, the company is looking for a market cap of Rs. 16.90 cr.

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, DDTL has posted turnover/net profits of Rs. 37.48 cr. / Rs. 0.71 cr. (FY19), Rs. 32.06 cr. / Rs. - (0.24) cr. (FY20) and Rs. 2.27 cr. / Rs. 0.11 cr. (FY21). While its top and bottom lines marked declining trends, for FY21 it posted a drastically lower top line with a good surplus in a pre-IPO year and is a surprising one as it incurred a loss for FY20.

For the last three fiscals, DDTL has posted an average EPS of Rs. 0.67 and an average RoNW of 5.13%. The issue is priced at a P/BV of 5.93 based on its NAV of Rs. 10.97 as of March 31, 2021, and at a P/BV of 2.59 based on its post-issue NAV of Rs. 25.14.

If we attribute FY21 earnings on fully diluted post issue equity, then the asking price is at a P/E of 154.76 making it an exorbitantly priced IPO with no match with its financial data so far.

DIVIDEND POLICY:
The company has not declared any dividend on the equity shares in the last five years. It will follow a prudent dividend policy post listing based on its financial performance and future prospects.

COMPARISON WITH LISTED PEERS:
As per offer documents, DDTL has shown BLS International Services as its listed peer. It is currently trading around 00 P/E (as of August 10, 2021). However, they are not truly comparable on an apple to apple basis.

MERCHANT BANKER'S TRACK RECORDS:
This is the 31st mandate from Hem Securities in the last five fiscals (including the ongoing one). Out of the last 10 listings, 4 issues opened at par and the rest between premiums ranging from 0.38% to 37.25% on the day of listing.

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