Sahana System NSE SME IPO review (Avoid)

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Review By Dilip Davda on May 28, 2023

•    SSL is primarily in the business of offering IT-related services.
•    Recently it has diversified into the non-related business of EV charging stations. 
•    It has reported growth in its top and bottom lines for the reported periods. 
•    The sustainability of such margins going forward is a major concern, as it is operating in a highly competitive and fragmented segment. 
•    The is no harm in skipping this High Risk/Low Return bet. 

ABOUT COMPANY:
Sahana System Ltd. (SSL) is engaged in the business of offering IT-related services including web app development, mobile application development, AI & ML development, ChatBot development, product prototyping, graphics designing, UI / UX design, SEO & ASO, digital marketing, website & application migration, cyber security and outsourcing of IT services. Some of the industries it caters to include healthcare, surveillance, retail, education/e-learning, restaurants, banking, media & entertainment and fintech. 

SSL is also engaged in the trading of hardware instruments related to Franking Machines / Computers / LED / Laptops. So far, it has been successful in getting repeated orders from clients.

Recently the company has ventured into the non-related business of EV charging stations. The company, as a provisionally empanelled member, has been allocated 500 locations in the state of Andhra Pradesh. It is already in the process of organizing surveys of the locations to ascertain the economic viability of the projects. At present, a feasibility survey has been completed for 45 locations and the process of procuring the charging stations for 25 locations has also begun. SSL has already finalized the vendors for the supply of charging stations after a detailed technical and financial study of 25 locations. As of the date of filing this RHP, it had 20 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden IPO of 2425000 equity shares of Rs. 10 each via a book-building route. It has announced a price band of Rs. 132 - Rs. 135 per share and mulls mobilizing Rs. 32.74 cr. at the upper price band. The issue opens for subscription on May 31, 2023, and will close on June 02, 2023. The minimum application to be made is for 1000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 30.33% of the post-IPO paid-up capital of the company. 

After reserving 125000 shares (5.15%) for the market maker portion, the company has allocated not more than 10% (230000 shares) for QIBs, not less than 45% (1035000 shares) for HNIs and not less than 45% (1035000 shares) for Retail investors. 

From the net proceeds of the issue process, the company will utilize Rs. 6.50 cr. for working capital, Rs. 14.45 cr. for installation of EV charging station and the rest for general corporate purposes. 

This issue is jointly lead and managed by Unistone Capital Pvt. Ltd. and Interactive Financial Services Ltd. and Purva Sharegistry (India) Pvt. Ltd. is the registrar of the issue. Rikhav Securities Ltd. is the market maker for the company. 

Having converted initial equity shares at par, the company converted further equity shares at a consideration of Rs. 1225 per share in March 2022. It has also issued bonus shares in the ratio of 90 for 1 in March 2022, and 4 for 5 in September 2022. The average cost of acquisition of shares by the promoters is Rs. 4.99 per share. 

Post-IPO, SSL's current paid-up equity capital of Rs. 5.57 cr. (5571493 shares) will stand enhanced to Rs. 8.00 cr. (7996493 shares). Based on the upper price band of the IPO, the company is looking for a market cap of Rs. 107.95 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, SSL has posted a turnover/net profit of Rs. 3.31 cr. / Rs. 0.16 cr. (FY21), Rs. 12.17 cr. / Rs. 1.41 cr. (FY22), and Rs. 24.14 cr. / Rs. 6.40 cr. (FY23). The sudden boost in margins to the tune of 25% plus for FY23 not only raises eyebrows but also hints at some window dressing in the pre-IPO year to get a fancy price for the IPO. 

For the last three fiscals, the company has reported an average EPS of Rs. 6.64 and an average RoNW of 55.74%. The issue is priced at a P/BV of 6.97 based on its NAV of Rs. 19.38 as of March 31, 2023, and at a P/BV of 2.52 based on its post-IPO NAV of Rs. 53.53 (at the upper cap). 

If we attribute FY23 super earnings on post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 16.88 making it a fully priced issue. The sustainability of such margins going forward remains a major concern, as the segment will have many players in the fray in the near term.

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 no listed peers to compare with. 

MERCHANT BANKER'S TRACK RECORD:
This is the 10th mandate from Unistone in the last four fiscals (including the ongoing one). Out of the last 9 listings, 1 closed at a discount to the offer price on the listing date. 

This is the 8th mandate from Interactive Financial in the last three fiscal (including the ongoing one). Out of the last 7 listings, 2 closed at a discount to the offer price on the listing date. 

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