Kore Digital NSE SME IPO review (Avoid)

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Review By Dilip Davda on May 30, 2023

•    KDL is engaged in providing high-end communication solutions.
•    It operates only in the Maharashtra region. 
•    Based on its financial performance so far, the issue appears aggressively priced. 
•    It is operating in a highly competitive and fragmented segment.
•    There is no harm in skipping this greedily priced issue. 

ABOUT COMPANY:
Kore Digital Ltd. (KDL) is set up with an object to provide high-end communication solutions to corporate and Telecom Network Operators. KDL is a growing passive telecommunication infrastructure provider in Maharashtra, engaged primarily in the business of installing and commissioning Poles, Towers and Optical Fibre Cable ("OFC") Systems in Maharashtra. "Passive infrastructure" refers to the telecommunication towers for wireless telecommunication services and "OFC" is used for the purpose of hosting and assisting in the operation of the active infrastructure used for transmitting telecommunications signals or transporting voice and data traffic. Being a passive communication infrastructure Company, it is focused towards providing passive communication infrastructure services mainly to the Telecom Network Operators, Broad Band Service Operators and Internet Service Providers ("ISPs") in Maharashtra, especially in locations in and around Mumbai.

The company has been licensed by the Department of Telecommunications (DoT) with the Infrastructure Provider (IP)-I License in the year 2009, under which it can establish and maintain assets Dark Fibres, right of way, duct space and tower for the purpose to grant on lease or rent or sale basis to the licensees of Telecom Network Operators, Broad Band Service Operators and ISPs. It also provided support services such as project management for laying of the duct and optic fibre cables, construction of basic transmission and telecom utilities, dark fiber leasing, optical fiber network construction, maintenance of duct and optic fibre and optical fibre project turnkey services to various, Telecom Network Operators & Broad Band Service Operators and ISPs across Maharashtra. Apart from laying the network under the project or its own network, KDL is also engaged in the operations & maintenance activity of the fibre network and preventing the underground optic fiber therein from getting cut due to activities like road repairs, digging and expansion works by various authorities.

As on the date of filing this Prospectus, it has laid fiber of around 450 Kms for Telecom Network Operators are Bharti Airtel Limited, Vodafone Idea Ltd, Tata Teleservices and Reliance Jio, which includes fibre laid under Vendor Projects and own network running across Mumbai- Navi Mumbai, Thane, Bhiwandi, Kalyan, Panvel, and in Pune. As of December 31, 2022, it had 19 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden IPO of 1000000 equity shares of Rs.10 each at a fixed price of Rs. 180 per share to mobilize Rs.18.000 cr. The issue opens for subscription on June 02, 2023, and will close on June 07, 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 28.41% of the post-issue paid-up capital of the company. KDL is spending Rs. 0.50 cr. for this IPO process and from the net proceeds, it will utilize Rs. 11.20 cr. for working capital, Rs. 1.80 cr. for investment in strategic acquisition/joint venture and Rs. 4.50 cr. for general corporate purposes. 

First Overseas Capital Ltd. is the sole lead manager and Bigshare Services Pvt. Ltd. is the registrar of the issue. NNM Securities Pvt. Ltd. is the market maker for the company. 

The company has issued initial equity shares at par value and has also issued bonus shares in the ratio of 251 for 1 in January 2023. The average cost of acquisition of shares by the promoters is Rs. 0.04 per share. 

Post-IPO, KDL's current paid-up equity capital of Rs. 2.52 cr. will stand enhanced to Rs. 3.52 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 63.36 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, KDL has posted a total revenue/net profit of Rs. 0.88 cr. / Rs. 0.02 cr. (FY20), Rs. 3.98 cr. / Rs. 0.26 cr. (FY21), and Rs. 16.94 cr. / Rs. 2.18 cr. For 9M of FY23 ended on December 31, 2022, it earned a net profit of Rs. 2.41 cr. on a turnover of Rs. 11.96 cr. The quantum jump in top and bottom lines for FY22 onward raises eyebrows. It appears that the company has done some window dressing in the pre-IPO year to fetch fancy pricing for the IPO.

For the last three fiscals, KDL has reported an average EPS of Rs. 1179.32 and an average RoNW of 72.24% (on the basis of pre-bonus capital). The issue is priced at a P/BV of 8.92 on the basis of its NAV of Rs. 20.18 as of December 31, 2022, and at a P/BV of 2.75 based on its post-IPO NAV of Rs. 65.51 per share. 

If we annualize FY23 super earnings and attribute it to post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of around 19.72, making it an aggressively priced issue. Based on FY22 earnings the P/E stands at 29.08.

DIVIDEND POLICY:
The company has not declared any dividends since incorporation. It will adopt a prudent dividend policy post-listing, based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per the offer document, the company has shown Suyog Tele as their listed peer. It is currently trading at a P/E of around 9.82 (as of May 30, 2023. However, they are not truly comparable on an apple-to-apple basis.  

MERCHANT BANKER'S TRACK RECORD:
This is the 16th mandate from First Overseas in the last four fiscals (including the ongoing one). Out of the last 10 listings, 1 opened at discount, 2 at par and the rest listed at premiums ranging from 2.5% to 43.53% on the listing date. 

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