Drone Destination NSE SME IPO review (May apply)

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Review By Dilip Davda on July 5, 2023

•    DDL is a DGCA-authorized RPTO and Drone service provider.
•    It has posted super performance for FY23 after average financial data for the previous two fiscals.
•    Based on bumper earnings of FY23, the IPO is aggressively priced. 
•    The segment is getting crowded with many players and gearing for cut-throat competition.
•    Well-informed/cash surplus investors may park funds with a long-term perspective.

PREFACE:
At the first stage, the Lead Manager/company announced its maiden IPO timeline from 06th July 23, to 11th July 23 (6th for Anchor and 7 to 11 other categories) as per the RHP filed with NSE Emerge and the IPO ad in Business Standard dated July 03, 2023. Surprisingly, even before the opening of the IPO, a new ad about the change in the timeline from 06th July 23 to 13th July 23 (6th for Anchor and 7 to 13th for other categories) appeared in Business Standard of July 04, 2023. This raised an eyebrow and surprised one and all on an extension of the timeline. When checked with the agencies involved, they attributed this move to a request from a bunch of investors for their accommodation, as they were to get refunds from Senco Gold IPO on or after 11th July 23. This is really confusing as well as a gesture of goodwill for investors. 

Primary market circles have opined that if the company wanted to accommodate the bunch of investors for rotation of their investible funds, they could have ideally differed the opening date by a day i.e. 7th for Anchor and 10th to 13th July 23 for other categories, this could have well sufficed the minimum opening period of 3 working days. The sudden inclusion of two more days has sent wrong signals in the market. Inadvertently this is the first mandate from Narnolia Financial Services Ltd., a new Merchant Banker from Kolkata.  Surprisingly we are witnessing two market makers for this IPO that is trying to encase the fancy of investors for the Drone segment. This IPO is underwritten by Kantilal Chhaganlal Securities Pvt. Ltd. (85%) and Narnolia Financial Services Ltd. (15%).

ABOUT COMPANY:
Drone Destination Ltd. (DDL) is a DGCA-authorized Remote Pilot Training Organisation (RPTO) offering Certified training programs at multiple locations Pan-India. After due completion of the course, the RPTO generates a Remote Pilot Certificate (RPC) from DGCA's Digital Sky Platform for a particular Class & Category of Drone. The RPC is valid for a maximum period of 10 years under the Drone Rules, 2021. As on May 03, 2023, the company has trained 362 drone pilots in India (source: https://digitalsky.dgca.gov.in/remote_pilots) for which Remote Pilot Certificate has been issued by DDL.

Further, in Oct 2020, Indira Gandhi Rashtriya Uran Akademi (IGRUA) entered into an agreement with the company for providing DGCA-certified Drone Training. IGRUA & Drone Destination are currently imparting training at seven of its DGCA-Authorised Drone Training Bases in Gurugram, Bangalore, Gwalior, Kangra, Coimbatore, Madurai and Bhopal. As on May 03, 2023, DDL along with IGRUA has trained 932 drone pilots in India (Source: https://digitalsky.dgca.gov.in/remote_pilots) for which Remote Pilot Certificate is issued by Indira Gandhi Rashtriya Uran Akademi. (Source: https://igrua.gov.in/Drone%20Trg.htm)

In this, the company has already deployed 34 drone pilots & co-pilots for conducting village and large-scale across Uttar Pradesh, Gujarat and Karnataka. In the ongoing project, its drones have already flown4481 villages as on April 30, 2023. As of March 31, 2023, it had 74 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden IPO of 6800000 equity shares of Rs. 10 each via a book-building route with a price band of Rs. 62 - Rs. 65 per share. It mulls mobilizing Rs. 44.20 cr. at the upper cap of the price band. The issue opens for subscription on 7th July 2023 and will close on the extended date of July 13, 2023. (as explained in PREFACE). The minimum application to be made is for 2000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 27.98% of the post-IPO, paid-up capital of the company. From the net proceeds of the IPO funds, DDL will utilize Rs. 10.00 cr. for the purchase of new Drones, Rs. 5.50 cr. for purchase of vehicles, Rs. 2.05 cr. for capital expenditure, Rs. 8.50 cr. for working capital and the rest for general corporate purposes.  

DDL has reserved up to 500000 equity shares for the market makers and from the rest, it has allocated not more than 1888000 shares for Anchor, not more than 1232000 shares for QIBs, not less than 960000 shares for HNIs and not less than 2220000 shares for Retail investors. 

Narnolia Financial Services Ltd. is the sole lead manager and Maashitla Securities Pvt. Ltd. is the registrar of the issue. Surprisingly, Nikunj Stock Brokers Ltd. and Share India Securities - both are the market makers for the company. 

Having issued/concerted initial equity shares at par, the company issued further equity shares at the price of Rs. 80 and Rs. 165 per share in March 2023. It has also issued bonus shares in the ratio of 2.5 for 1 in May 2023. The average cost of acquisition of shares by the promoters is Rs. 2.91 and Rs. 2.94 per share. 

Post-IPO, DDL's current paid-up equity capital of Rs. 17.50 cr. will stand enhanced to Rs. 24.30 cr. Based on the upper cap of the IPO price, the company is looking for a market cap of Rs. 157.95 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, DDL has posted a turnover/net profit - (loss) of Rs. 0.39 cr. / Rs. - (0.05) cr. (FY21), Rs. 2.57 cr. / Rs. 0.21 cr. (FY22), and Rs. 12.08 cr. / Rs. 2.44 cr. (FY23). The sudden boost in its top and bottom lines for the pre-IPO year FY23 raise eyebrows and concern over sustainability. 

For the last three fiscals, DDL has reported an average EPS of Rs. 18.49 (based on pre-bonus equity capital) and an average RoNW of 5.38%. The issue is priced at a P/BV of 1.85 based on its NAV of Rs. 35.15 as of March 31, 2023 (based on pre-bonus equity capital), and at a P/BV of 1.95 based on its post-IPO NAV of Rs. 33.36 per share (at the upper cap).

If we attribute its super FY23 earnings to the post-IPO fully diluted paid-up equity capital of the company, then the asking price is at a P/E of 64.35. Thus issue appears aggressively priced based on bumper earnings. 

DIVIDEND POLICY:
The company has not declared any dividends for any financial year. 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 DroneAcharya Aerial as their listed peer. It is currently trading at a P/E of around 116.83 (as of July 05, 2023). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
This is the 1st mandate from Narnolia Financial in the current fiscal. Thus it has no track records.  

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