Synoptics Tech NSE SME IPO review (May apply)

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Review By Dilip Davda on June 25, 2023

•    STL is an IT services solution provider and has well-known B2B customers.
•    The company has posted steady growth in its top and bottom lines.
•    Based on 9M-FY23 earnings, the issue appears fully priced.
•    As of May 31, 2023, it has orders on hand worth Rs. 28.00 cr.
•    Well-informed/cash surplus investors may park funds with a long-term perspective.

ABOUT COMPANY:
Synoptics Technologies Ltd. (STL) is an IT Services company offering solutions in the areas of IT Infrastructure like connectivity to the Branches, Supply, implementation and support of the network equipment needed to run the IT setup like routers, switches etc. It designs the solution for customers who need to put their applications on Cloud. The company helps with the application migration and manages the setup in the cloud. IT Security solutions like firewall installation and management. Data Centre design and solution with newer technology to optimize the investment and use less space and power and with clearly defined outcomes. 

STL helps enterprises, small businesses and Governments in their Digital journey with various use cases of specific industry verticals with its technology-led and innovation-driven approach. It is currently operating across India and with a team of 584 employees. It has the ability to provide our B2B (Business to Business) customers with a blend of optimal functionality, value for money, commitment and flexibility (coupled with on-site support across India). It aims to reduce the Total Cost of Ownership (TCO) and increase Return on Investment (RoI) for customers to adopt any kind of Digital Transformation use case with STL's technology-led and innovation-driven approach.

Its B2B customers include government entities, public sector undertakings ("PSUs"), and private enterprises. Some of its esteemed customers include TATA Communications Limited, BOB Financial Services, Blue Dart Express Limited, Lifestyle International Private Limited, Shoppers Stop Limited, Hennes & Mauritz Retail Private Limited (H&M), Fedbank Financial Services Limited, GIC Housing Finance Ltd, Motilal Oswal Financial Services Limited, Government of Gujarat etc.

The company recently signed an agreement with BSNL to become their authorized Private LTE / Private 5G service partner nationwide this would establish STL into upcoming private LTE / Private 5G opportunities. The Company is headquartered in Mumbai and has regional offices in 17 locations throughout India including Andhra Pradesh, Bihar, Chandigarh, Delhi, Gujarat, Haryana, Karnataka, Kerala, Madhya Pradesh, Odisha, Punjab, Rajasthan, Telangana, Tamil Nadu, Uttar Pradesh, Uttarakhand and West Bengal. As of May 31, 2023, its order book stood at Rs. 28.00 cr.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden combo IPO of 2280000 equity shares of Rs. 10 each at a fixed price of Rs. 237 per share to mobilize Rs. 54.04 cr. The issue consists of a fresh equity issue of 1480000 equity shares and 800000 equity shares by an Offer for Sale (OFS). The issue opens for subscription on June 30, 2023, and will close on July 05, 2023. The minimum application to be made is for 600 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 26.89% of the post-IPO paid-up capital of the company. STL is spending Rs. 0.80 cr. (including Rs. 0.30 cr. for OFS) for this IPO process and from the net proceeds of the fresh equity issue, it will utilize Rs. 5.00 cr. for repayment of certain borrowings, Rs. 17.58 cr. for working capital, Rs. 5.30 cr. for investment in strategic acquisition/joint venture, and Rs. 6.70 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. 

After issuing initial equity shares at par value, the company issued further equity shares at a price of Rs. 45 per share in June 2018 and also issued bonus shares in the ratio of 139 for 1 in the same month. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 0.07, and  Rs. 0.26 per share.  

Post-IPO, STL's current paid-up equity capital of Rs. 7.00 cr. will stand enhanced to Rs. 8.48 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 200.98 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, STL has posted a turnover/net profit of Rs. 22.11 cr. / Rs. 1.82 cr. (FY20), Rs. 34.80 cr. / Rs. 2.36 cr. (FY21), and Rs. 50.97 cr. / Rs. 4.32 cr. (FY22). For 9M of FY23 ended on December 31, 2022, it earned a net profit of Rs. 5.25 cr. on a turnover of Rs.34.47 cr. The sudden boost in its bottom line in the pre-IPO year raises eyebrows and concern over its sustainability.

For the last three fiscals, STL has reported an average EPS of Rs. 4.65 and an average RoNW of 19.48%. The issue is priced at a P/BV of 6.91 based on its NAV of Rs. 34.32 as of December 31, 2022, and at a P/BV of 3.49 based on its post-IPO NAV of Rs. 68.00 per share. 

For the reported periods, its ROE and ROCE have improved from 15.07% to 21.87% and 15.48% to 19.16%. and its PAT margin improved from 8.23% to 15.15% for the said periods. The sudden boost in the bottom line for 9M-FY23 raises eyebrows. Rise in its net debt for the said periods from Rs. 10.01 cr. to Rs. 16.50 cr. raises concern. 

If we annualize FY23 earnings and attribute it to the post-IPO fully diluted paid-up capital of the company, then the asking price is at a P/E of 25.32. Thus the issue appears fully priced. 

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 Allied Digital as their listed peer. It is currently quoting at a P/E of 59.48 (as of June 23, 2023). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
This is the 17th 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 2.50% to 43.53% on the listing date. Thus the LM has an average track record.

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