Digikore Studio NSE SME IPO review (Apply)

Digikore Studio NSE SME IPO review (Apply)

• DSL is one of the dominant players in the VFX industry having international and domestic operations.
• It has posted growth in its top and bottom lines for the reported periods.
• Based on annualized FY24 earnings, the issue is reasonably priced.
• Investors may apply for short to long-term rewards in this fancied segment company.

ABOUT COMPANY:

Digikore Studios Ltd. (DSL) is a dominant player in the VFX industry and provides its specialized services to international and domestic clients. DSL serves as a hub for top-tier industry talent and has a production facility in India. It specializes in delivering VFX for a diverse range of projects such as films, web series, TV Series, Documentaries, and Commercials and has a world-class studio in Pune -Maharashtra.

The company made its mark in the realm of animation and VFX. It worked with projects like “Thor” – Love and Thunder, “Black Panther” – Wakanda Forever, “Glass Onion” – A Knives Out Mistery, “Deadpool”, “Star Trek”, “Jumanji”, “The Last Ship”, “Titanic”, “Ghost Rider”, etc.

DSL has approvals from production houses like Disney/Marvel, Netflix, Amazon, Apple, Paramount, Warner Bros., Lions Gate, etc. Besides this, the company has embarked on a new venture known as Digikore Matchmaking, extending its portfolio to encompass new dimensions of business endeavor. The company conducts its operation with a focus on reliability, and cost-effectiveness and thus provides services at competitive prices for the US and European markets. The company has a vision to emerge as the best VFX company producing quality content for both international and domestic markets. As of July 31, 2023, it had 357 employees on its payroll.

ISSUE DETAILS/CAPITAL HISTORY:

The company is coming out with a maiden combo IPO of 1782400 equity shares of Rs. 10 each via the book-building route. It has announced a price band of Rs. 168 – Rs. 171 per share. The issue consists of 1260800 fresh equity shares issue (worth Rs. 21.56 cr.) and 521600 shares (worth Rs. 8.92 cr.) by way of an Offer for sale (OFS) to mobilize Rs. 30.48 cr. at the upper cap. The issue opens for subscription on September 25, 2023, and will close on September 27, 2023. The minimum application to be made is for 800 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 28.15% of the post-IPO paid-up capital of the company. From the net proceeds of the fresh equity issue funds, it will utilize Rs. 16.96 cr. for working capital, and the rest for general corporate purposes.

Sarthi Capital Advisors Pvt. Ltd. Is the sole lead manager, Bigshare Services Pvt. Ltd. Is the registrar of the issue and Gretex Share Broking Ltd. Is the market maker for the company.

Having issued initial equity shares at par value, the company issued further equity shares at a fixed price of Rs. 164 per share in August 2023. It has also issued bonus shares in the ratio of 3 for 1 in July 2023. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs.0.01, and Rs. 1.63 per share.

Post-IPO, DSL’s current paid-up equity capital of Rs. 5.07 cr. will stand enhanced to Rs. 6.33 cr. At the upper band of IPO pricing, the company is looking for a market cap of Rs. 108.29 cr.

FINANCIAL PERFORMANCE:

On the financial performance front, for the last three fiscals, DSL has (on a standalone basis) posted a total revenue/net profit of Rs. 6.15 cr. / Rs. 0.02 cr. (FY21), Rs. 24.88 cr. / Rs. 0.47 cr. (FY22), and Rs. 35.56 cr. / Rs. 4.37 cr. (FY23). For Q1 of FY24, it earned a net profit of Rs. 2.80 cr. on a total revenue of Rs. 11.83 cr.

While on a consolidated basis, the company posted a total revenue/net profit of Rs. 24.88 cr. / Rs. 0.47 cr. (FY22), and Rs. 36.92 cr. / Rs. 3.89 cr. (FY23). For Q1 of FY24, it earned a net profit of Rs. 2.71 cr. on total revenue of 11.87 cr.

For the last three fiscals, the company has reported an average EPS of Rs. 19.81 and an average RoNW of 47.40%. The issue is priced at a P/BV of 2.33 based on its NAV of Rs. 73.53 as of June 30, 2023, and at a P/BV of 3.03 based on its post-IPO NAV of Rs. 56.49 per share (at the upper cap).

If we attribute FY24 annualized earnings to the post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 9.99. The issue appears reasonably priced based on its financial performance so far.

On a standalone basis, the company has reported a PAT margin of 0.29% (FY21), 1.87% (FY22), 12.30% (FY23), and 23.65% (Q1-FY24).

DIVIDEND POLICY:

The company has not declared any dividends in any financial year so far. It will adopt a prudent dividend policy based on its financial performance and future prospects.

 

COMPARISON WITH LISTED PEERS:

As per the offer documents, the company has shown Phantom Digital and Prime Focus as their listed peers. They are trading at a P/E of 29.99, and 00 (as of September 20, 2023). However, they are not comparable on an apple-to-apple basis.

MERCHANT BANKER’S TRACK RECORD:

This is the 5th mandate from Expert Global in the last two fiscals (including the ongoing one). Out of the last 4 listings, 1 opened at a discount and the rest with premiums ranging from 10.47% to 42.72% of the date of listing. However, the offer document misses some data on page no. 282-283 of the offer documents.

Conclusion / Investment Strategy

DSL is one of the leading players in the VFX segment with international and domestic services. It has posted steady growth in its top and bottom lines. Based on annualized FY24 earnings, the issue appears reasonably priced. Investors may park funds for short to long-term rewards.

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