Spectrum Talent NSE SME IPO review (May apply)

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Review By Dilip Davda on June 6, 2023

•    This is the biggest SME IPO in history so far.
•    STML is one of the leading global recruitment companies.
•    It is providing HR solutions in many verticals and is thus shielded against the downturn.
•    It has reported growth in its top and bottom lines.
•    Since the last two fiscals, it has also entered in exports of mobiles to gulf countries. 
•    Investors may consider parking funds with medium to long-term perspectives.

ABOUT COMPANY:
Spectrum Talent Management Ltd. (STML) is one of the leading global recruitment companies in India which offers a wide array of services for human resource solutions for Retail, Engineering, ITITeS, Logistics, Pharma, Manufacturing, BFSI & Consulting. During COVID it added new lines of businesses and started exporting Mobile Phones of various brands from India to the UAE.

The services offered by the company include general staffing, recruitment process outsourcing, global HR services and the export of mobile phones to Gulf countries. It has emerged as the proven third-party payroll provider to meet the manpower staffing demands on the fly. Helps clients increase their management bandwidth. It provides stable revenue and profitability growth. It also offers recruitment solutions that are custom-built for specific projects as well as to support employers on an ongoing basis. The company has a cross-training module of staffing that reduces the risk of attrition as well as enhances the time frame of the contract.

As of the date of this Red Herring Prospectus, STML serves more than 275 clients in domestic and offshore markets. The Human Resource database is the key asset for the industry, as on December 31, 2022, it had 15606 personnel deployed at various locations for its clients. As of the date of this Red Herring Prospectus, it also had a wholly owned subsidiary namely STM Consulting Inc. majorly operating in the USA. Further, it has a 90% subsidiary namely STM Consulting Limited, majorly operating in the UK. Both entities are engaged in the business of employment placement agencies, Temporary employment agency activities and Human resources provision and management of human resources functions.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden combo book-building route IPO of 5185600 fresh equity shares (worth Rs. 89.71 cr.) and an Offer for Sale of 892000 equity shares (worth Rs. 15.43 cr.). The overall size of the issue is 6077600 shares worth Rs. 105.14 cr. at the upper price band. The issue opens for subscription on June 09, 2023, and will close on June 14, 2023. It has announced a price band of Rs. 169 - Rs. 173 per share having a face value of Rs.10 each. 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. This is the biggest SME IPO in history so far. 

The issue constitutes 26.32% of the post-IPO paid-up equity capital of the company. It has allocated 304000 shares for Market Maker, 576000 shares for QIB, 2598400 shares for HNIs, and 2599200 shares for Retail investors. 

The offer document is silent on the funds' utilization details. However, as per information provided by the Lead Manager, from the net proceeds of the fresh equity issue, the company will utilize Rs. 74 cr. for working capital, Rs. 2 cr. for the acquisition of similar business or complementary areas, and the rest for general corporate purposes. 

Sarthi Capital Advisors Pvt. Ltd. is the sole lead manager and Skyline Financial Services Pvt. Ltd. is the registrar of the issue. Rikhav Securities Ltd. is the market maker for the company. Surprisingly, Affinity Global Capital Market Pvt. Ltd. has underwritten 80.97% while Sarthi Capital Advisors Pvt. Ltd. has underwritten 19.03%. This IPO got delayed by about a month due to a change in its team of Lead Managers. Earlier this IPO mandate was with two lead managers and now only 1 lead manager. 

Having issued initial equity shares at par, the company issued further equity shares at a price of Rs. 60 per share in December 2022. It has also issued bonus shares in the ratio of 94 for 1 in March 2019 and in the ratio of 29 for 10 in December 2022. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 0.03 per share. 

Post-IPO, STML's current paid-up equity capital of Rs. 17.91 cr. will stand enhanced to Rs. 23.09 cr. Based on the upper band of the IPO price, the company is looking for a market cap of Rs. 399.51 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, STML posted a turnover/net profit of Rs. 323.62 cr. / Rs. 6.76 cr. (FY20), Rs. 302.96 cr. / Rs. 4.76 cr. (FY21), and Rs. 483.72 cr. / Rs. 15.53 cr. (FY22). For 9M of FY23 ended on December 31, 2022, it earned a net profit of Rs. 19.98 cr. on a turnover of Rs. 584.16 cr. 

For the last three fiscals, the company reported an average EPS of Rs. 10.25 and an average RoNW of 42.99%. The issue is priced at a P/BV of 6.40 based on its NAV of Rs. 27.05 as of December 31, 2022, and at a P/BV of 2.89 based on its post-IPO NAV of Rs. 59.83 per share (at the upper cap). 

According to the management, though the company added good revenues from the export of mobiles for FY22 (Rs. 100.65 cr.), and 9M of FY23 (Rs. 201.65 cr.), it may discontinue this business and focus on the core HR services business in the future. 

Except for FY21 (a pandemic year), STML has reported a steady average for RoCE/RoE of around 47%/45% and PAT margins of around 2.8% on average for the reported periods. In fact, its margins for December 31, 2022, ended period was 3.42% indicating a surge with the cost-efficient model of the business.

If we annualize FY23 earnings and attribute it to the post-IPO paid-up capital of the company, then the asking price is at a P/E of 15. Thus the issue appears reasonably priced compared to its nearer peers.

DIVIDEND POLICY:
The company paid a dividend for FY20 and thereafter it skipped. 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 Quess Corp and TeamLease Services as their listed peers. They are currently trading at a P/E of 48.91, and 38.63 (as of June 06, 2023.)  However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
This is the 48th mandate from Sarthi Capital in the last twelve fiscals (including the ongoing one). Out of the last 10 listings, 2 opened at discount, 2 at par and the rest listed at premiums ranging from 0.71% to 333.05% on the listing date. 

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