Enfuse Solutions NSE SME IPO review (May apply)

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Review By Dilip Davda on March 13, 2024

•    ESL is engaged in providing integrated digital solutions across various domains.
•    It posted growth in its top and bottom lines for the reported periods. 
•    The sudden boost in net profits from FY23 onwards raise eyebrows. 
•    Based on FY24 annualized earnings, the issue appears fully priced. 
•    Well-informed investors may park funds for the medium to long term rewards. 

ABOUT COMPANY:
Enfuse Solutions Ltd. (ESL) is engaged in business of providing integrated Digital solutions across various domains including (i) In Data Management & Analytics (ii) E-commerce & Digital Services (iii) Machine Learning & Artificial intelligence (iv) Edtech & Technology Solutions. It provides these service solutions by combining custom-designed data processes, delivery teams that include both generalists and domain specialists, and its in-house software to streamline and automate various processes.

Its business operations encompass various domains (i) In Data Management & Analytics, it organizes and analyzes data, providing tailored insights for informed decision-making such as Master Data Management, Product information Management etc. (ii) Ecommerce & Digital Services form a core area where it develops and optimizes digital platforms for seamless online experiences such as E-commerce platform management, content management, Digital marketing etc. (iii) Machine Learning & AI represent its capabilities in advanced technologies, offering innovative solutions such as tagging/labelling, Transcription , Annotation etc. (iv) Edtech & Technology Solutions focus on leveraging technology to enhance educational experiences and overall technological solutions such as live Proctoring, Record and review, Student Counselling etc.

The company works as consultants for its clients as per the terms of sub-contracting agreements entered with them. For e.g., if client is desirous of providing digitization services to one of its customers, then, ESL as consultants will work on behalf of client to provide said services to their customers. ESL executes a Statement of Work with clients which specify the scope of ESL's services to be provided to their customers which includes the term of the project, background and objective of the project and description of services to be provided. ESL's diverse suite of offerings, spanning Data as a Service (DAAS) and software solutions, encompasses an AI platform for tagging audio, video, image, and documents, Edtech AI solutions, data annotation and curation platforms, data engineering, data science, cloud computing, and digital marketing.

Through its clients, ESL has served entrepreneurs ranging from start-up enterprises to established companies, primarily consisting of blue-chip companies operating in sectors such as Technology, BFSI (Banking, Financial Services, and Insurance), Retail, Financial Services (FinTech), Media and Entertainment, Health, Education and various other industries. Recently, it has received work order for System Integrator for Computerization of PACS from the Commissioner for Co-operation & Registrar of Cooperative Societies, Maharashtra, for providing services like Operationalization of the software, Data digitization and migration, UAT and System Test, setting up of support centres, Compliance reports etc. of Rs. 64.53 Cr. After commencing its business with Delivery Centre-I in Mira Road at Mumbai in 2019, it expanded its operation by setting up Delivery Centre-II at Vikhroli - Mumbai. Its export sales contributed on an average 78% per year in its total revenues. As of December 31, 2023, it had 448 employees on its payroll and also engaged contract manpower as and when needed. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden a maiden book building route IPO of 2337600 equity shares of Rs. 10 each to mobilize Rs. 22.44 cr. at the upper cap. The company has announced a price band of Rs. 91 - Rs.  96 per share. The issue opens for subscription on March 15, 2024, and will close on March 19, 2024. The minimum application to be made is for 1200 shares and in multiples thereon, thereafter.  Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 26.42% of the post-IPO paid-up capital of the company. From the net proceeds of the IPO funds, it will utilize Rs. 3.84 cr. for repayment of certain borrowings, Rs. 10.50 cr. for working capital, and the rest for general corporate purposes. 

The issue is solely lead managed by Hem Securities Ltd., and Bigshare Services Pvt. Ltd. is the registrar of the issue. HEM group's Hem Finlease Pvt. Ltd. is the market maker for the company. 

The company has issued entire equity capital at par so far. It has also issued bonus shares in the ratio of 650 for 1 in October 2023. The average cost of acquisition of shares by the promoters is Rs. 0.00, and Rs. 002 per share. 

Post-IPO, company's current paid-up equity capital of Rs. 6.51 cr. will stand enhanced to Rs. 8.85 cr. Based on the upper IPO price band, the company is looking for a market cap of Rs. 84.94 cr.  

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has posted a total income/net profit of Rs. 17.20 cr. / Rs. 1.55 cr. (FY21), Rs. 25.57 cr. / Rs. 1.98 cr. (FY22), and Rs. 26.10 cr. / Rs. 2.93 cr. (FY23). For 9M of FY24 ended on December 31, 2023, it earned a net profit of Rs. 3.23 cr. on a total income of Rs. 28.05 cr. Thus it marked growth in its top and bottom lines for the reported periods. The boost in its bottom line from FY23 onwards raise eyebrows. 

For the last three fiscals, it has reported an average EPS of Rs. 3.66, and an average RONW of 57.76%. The issue is priced at a P/BV of 6.44 based on its NAV of Rs. 14.90 as of December 31, 2023, and at a P/BV of 2.85 based on its post-IPO NAV of Rs. 33.68 per share (at the upper cap).

If we attribute annualized FY24 earnings to its post-IPO fully diluted paid-p capital, then the asking price is at a P/E of 19.75. Based on FY23 earnings, the P/E stands at 29.00. Thus the issue appears fully priced. 

For the reported periods, the company has posted PAT margins of 9.04% (FY21), 7.76% (FY22), 11.22% (FY23), 11.51% (9M-FY24), and RoCE margins of 133.23%, 46.71%, 46.61%, 24.05% respectively for the referred periods. 

DIVIDEND POLICY:
The company has not declared any dividends for the reported periods of the offer document. 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 Vertexplus Techno, eClerx, and Systango Techno as their listed peers. They are trading at a P/E of 65.7, 22.5, and 23.0 (as of March 13, 2024). However, they are not comparable on an apple-to-apple basis.

MERCHANT BANKER'S TRACK RECORD:
This is the 42nd mandate from Hem Securities Ltd. in the last three fiscals, out of the last 10 listings, 1 opened at discount (Sona Machinery) and the rest with premiums ranging from 8.57% to 125% on the date of listing. 

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