Micropro Software NSE SME IPO review (Avoid)

Micropro Software NSE SME IPO review (Avoid)

• MSSL is in the business of software development and IT solutions services.
• It posted growth in its top lines from FY21 to FY23.
• Bumper profits in pre-IPO year raise eyebrows and concern over the sustainability.
• Based on FY24 annualized earnings, the issue appears aggressively priced.
• Investors may skip this pricey and dicey offer.

ABOUT COMPANY:
Micropro Software Solutions Ltd. (MSSL) is in the field of Software development, consulting along with Technical Services and providing cost-effective IT Solution to its clients. The Company designs, develops, standardizes, and customizes, in case of need, software solutions across various industry verticals. It does not outsource activities to third party vendors while providing the service to the customers.

MSSL acts like an end-to-end IT solution specialist service provider for clients which enables them to offload their IT operations. Since the Company provides software development and implementation services to various organizations including government agencies, E-governance in an integral part of software development services.

Certain software developed by it in the past are accessed by large number of users to sustain traffic load, hence apart from it being compliant to governance guidelines, these are also required to be secured from hacking and data leaks which is a part of overall governance. Hence, in the overall process of software development for process automation, E-governance becomes inseparable part of services. As of the date of filing this offer document, it had 124 employees on its payroll.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden IPO of 3790400 equity share of Rs. 10 each at a fixed price of Rs. 81 per share to mobilize Rs. 30.70 cr. The issue opens for subscription on November 03, 2023, and will close on November 07, 2023. The minimum application to be made is for 1600 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 26.36% of the post-IPO paid up capital of the company. MSSL is spending Rs. 4.51 cr. for this IPO process, and from the net proceeds, it will utilize Rs. 8.50 cr. for working capital, Rs. 12.85 cr. for capital expenditure., and Rs. 4.84 cr. for general corporate purposes.

Swaraj Shares & Securities Pvt. Ltd. is the sole lead manager and Purva Shareregistry (India) Pvt. Ltd. is the registrar of the issue. Nikunj Stock Brokers 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.70 per share in July 2023. It has also issued bonus shares in the ratio of 40 for 1 in June 2023. The average cost of acquisition of shares by the promoters is Rs. 2.44 per share.

Post-IPO, MSSL’s current paid-up equity capital of Rs. 10.51 cr. will stand enhanced to Rs. 14.38 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 116.48 cr.

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company posted a total revenue/net profit of Rs. 13.92 cr. / Rs. 1.30 cr. (FY21), Rs. 17.55 cr. / Rs. 2.67 cr. (FY22), and Rs. 22.17 cr. / Rs. 5.92 cr. (FY23). For first two months of FY24 ended on May 31, 2023, it earned a net profit of Rs. 0.48 cr. on a total revenue of Rs. 2.76 cr.

For the last three fiscals, the company has reported an average EPS of 162.69 (on pre-bonus basis) and an average RoNW of 29.13 %. The issue is priced at a P/BV of xx based on its NAV of Rs. 659.28 as of March 31, 2023, and at a P/BV of 2.43 based on its post-IPO NAV of Rs. 33.33 per share. Perhaps there appears to be some deliberation of not giving post-bonus basis NAV average and the NAV as of May 31, 2023.

If we attribute FY24 annualized earnings to post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 40.70. Thus issue appears aggressively priced.

DIVIDEND POLICY:
The company has not declared any dividends for any reported financial years. It will adopt a prudent dividend policy based on its financial performance and future prospects.

COMPARISON WITH LISTED PEERS:
As per the offer document, the company has shown Softtech Engg., Compucom Soft, and Persistent Systems as their listed peers. They are trading at a P/E of 37.93, 40.25, and 46.42 (as of October 31, 2023). However, they are not comparable on an apple-to-apple basis.

MERCHANT BANKER’S TRACK RECORD:
As per the data given in the offer document, this is the 4th mandate from Swaraj Shares in the current fiscal. The one SME IPO of Shoora Designs opened at a premium of 90% on the day of listing, while two IPOs referred therein, yet to hit the market. It’s really surprising that the merchant banker has given details of the IPOs that are approved, but not yet opened or listed. This appears to be the gimmick and an eyewash for investors.

Conclusion / Investment Strategy
The company is engaged in software developments and IT solution services. It has posted growth in its top lines for the reported periods till FY23. The sudden boost in its bottom line for FY23 appears to be a window dressing to pave the way for fancy valuations. Based on FY24 annualized earnings, the issue is aggressively priced. There is no harm in skipping this pricey and dicey bet.

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