Phantom Digital NSE SME IPO review (May apply)

•    PDEL is a trusted partner network for digital film VFX studio operations.
•    It has posted super results for FY22.
•    Near FY22 full-year profits for Q1 of FY23 raise eyebrows. 
•    Based on its current financial status, the issue appears fully priced. 
•    Well-informed/cash surplus/risk seekers may consider investing in this pricy bet. 

ABOUT COMPANY:
Phantom Digital Effects Ltd. (PDEL) is a Certified Trusted Partner Network (TPN) company, a full-fledged creative VFX studio, based in India operating in US and Canada through agencies. The Company is not having any offices in US or Canada.

It provides high-end visual effects solutions for commercials, feature films, and Web series globally.  PDEL offers all sorts of creative VFX works, ranging from Final Compositing and Roto to creating 3D Elements, Photo real creatures and Environments, 3D, match move, and Animations.

The Company is a creative VFX studio, specializing in Film, Web series, and Commercials. It has delivered more than thousands of shots for Domestic and International feature films (Hollywood), Web Series & commercials in the past few years. Apart from working for film production and commercials, PDEL periodically takes up subcontracts from larger visual effects studios as well.

Some of the recent Indian Projects & International Projects that PDEL has executed successfully and are well-recognized by the industry and well-appreciated by the viewer are – Vikram, RRR, Beast, Robot 2.0, Minnal Murali, Bahubali 1 and 2, Puli (South), Avengers, Superman and Lois, Transformers, etc. As of June 30, 2022, it had 306 employees on its payroll. For Q1 of FY23, its share of operation is around 95% from domestic markets.

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its needs of Capex for setting up of studios (Rs. 17.37 cr.), and general corporate purposes, PDEL is coming out with a maiden IPO of a combo issue of 3063600 equity shares of Rs. 10 each via book building route with a price band of Rs. 91 to Rs. 95 per share to mobilize Rs. xx cr. at the upper cap. The issue consists of 2640000 fresh equity shares and 423600 shares by an offer for sale (OFS). The minimum application to be made is for 1200 shares and in multiples thereon, thereafter. The issue opens for subscription on October 12, 2022, and will close on October 14, 2022. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes xx% of the post-issue paid-up capital of the company. From the residual portion after the market maker quota, the company has allocated 50% for QIBs, 15% for HNIs, and 35% for Retail investors.

The issue is solely lead managed by Corporate CapitalVentures Pvt. Ltd. and Purva Sharegistry (India) Pvt. Ltd. is the registrar to the issue. SS Corporate Securities Ltd. is the market maker for this company.

After issuing initial equity shares at par, the company issued bonus shares in the ratio of 899 shares for every 1 share held in August 2022. The average cost of acquisition of shares by the promoters is Rs. 0.001 per share.

Post-IPO, PDEL’s current paid-up equity capital of Rs. 9.00 cr. will stand enhanced to Rs. 11.64 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 110.58 cr.

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, PDEL has posted total revenue/ net profits of Rs. 13.27 cr. / Rs. 0.11 cr. (FY20), Rs. 7.15 cr. / Rs. 0.08 cr. (FY21), and Rs. 22.37 cr. / Rs. 4.90 cr. (FY22). For Q1 of FY23, it earned a net profit of Rs. 4.11 cr. on total revenue of Rs. 12.35 cr. It suffered a setback for FY21 on account of the pandemic.

For the last three fiscals, PDEL has reported an average EPS of Rs. 2.67 and an average RoNW of 60.50. The issue is priced at a P/BV of 9.13 based on its NAV of Rs. 10.41 as of June 30, 2022, and at a P/BV of 3.21 based on its post-IPO NAV of Rs. 29.59 (at the upper cap). It has posted bumper results for FY22 and Q1 of FY23, but the sustainability of such margins going forward raises concern.

If we annualize FY23 earnings and attribute it to the post-IPO paid-up equity capital of the company, then the asking price is at a P/E of around 6.72 and based on FY22 earnings, it stands at 22.56. Almost the entire FY22 profit in Q1 of FY23 appears to be the window dressing to pave the way for its rosy valuations. Based on its current status, the issue appears fully priced. 

DIVIDEND POLICY:
The company has not declared any dividends 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 document, PDEL has shown Prime Focus as their listed peer. It is currently trading at a P/E of 163.67 (as of October 07, 2022). However, they are not truly comparable on an apple-to-apple basis.

MERCHANT BANKER’S TRACK RECORD:
This is the 12th mandate from Corporate CapitalVentures in the last six fiscals (including the ongoing one). Out of the last 10 listings, 2 opened at discount and the rest with premiums ranging from 0.06% to 71.43% of the listing dates.