IPO Analysis: Updater Services Ltd

IPO Rating: Avoid

About the Issue 

Updater Services Limited (UDS) stands as a prominent and comprehensive business services provider in India, specialising in integrated facilities management services and business support services, serving clients across the country. The company is gearing up to launch its Initial Public Offering (IPO) for equity shares, each having a face value of Rs 10. The IPO price range is set between Rs 280 and Rs 300 per equity share, resulting in a total issue size of Rs 640 crore at the upper price band. 

The IPO is scheduled to commence on September 25, 2023, and will conclude on September 27, 2023. The anticipated listing on the exchange is set for October 09, 2023. The market lot size for the IPO is 50 shares, with the option to apply for multiples of this lot. Individual retail investors have the opportunity to apply for a maximum of 13 lots, equivalent to 650 shares or a total investment of Rs 1,95,000 assuming the upper price band.  

Objects of the Issue 

The company plans to allocate the net proceeds raised from the issue for the following purposes: 

1. Repayment and /or pre-payment of certain borrowings availed by the company 
2. Funding working capital requirements 
3. Pursuing inorganic initiatives 
4. General corporate purposes 

Promoter holding 

Raghunandana Tangirala and Shanthi Tangirala are the promoters of the company. The promoters currently hold a pre-issue shareholding stake of 80.58 per cent in the company. 

About the company 

Updater Services Limited (UDS) stands as a prominent and comprehensive business services provider in India, specializing in integrated facilities management services and business support services, serving clients across the country. The company’s service offerings span a broad spectrum of industries, encompassing FMCG, manufacturing, engineering, BFSI, healthcare, IT, automotive, logistics, aviation, maritime, infrastructure, retail, and more, effectively addressing the diverse needs of its clientele. 

Over the years, the company has embarked on a strategic path of acquiring various businesses, adhering to a consistent approach of integrating entities that synergize with their core operations. This approach has facilitated the establishment of an expansive business services platform. Within their portfolio, notable group companies include Denave, Matrix Business Services India Pvt Ltd, Avon Solutions & Logistics Pvt Ltd, and Global Flight Handling Services Pvt Ltd, among others. 

In the BSS sector, the company extends its expertise in audit and assurance services through its subsidiary, Matrix. Matrix is a prominent player in the field of dealer/distributor audits and retail audits, boasting an extensive branch network and a robust field associate presence. This strategic advantage has propelled the company to secure the top position in the Indian market, achieving an impressive market share of over 19 per cent for the financial year ending on March 31, 2023. Additionally, the company offers an array of supplementary services, including warehouse management, general staffing solutions, and institutional catering. 

Financials

Outlook and Valuation  

When analysing the financial performance, it's evident that the company achieved substantial revenue growth in FY23 thanks to higher service demand. The company strategically acquired majority stakes in Denave and Athena BPO as part of its expansion initiatives. However, it's worth noting that there was a considerable decline in net profit, primarily stemming from the impact of recent acquisitions that necessitated certain one-time adjustments.  

The company holds the position of India's second-largest participant in the integrated facilities management services sector, boasting enduring partnerships with renowned clients. However, it faces potential challenges in the form of a considerably high attrition rate and trade receivables. Notably, trade receivables account for 35 per cent of the total assets in FY23, signifying a substantial portion of the company's financial resources. Any instances of default or delays in these receivables could potentially impact the smooth functioning of its business operations. 

The issue is priced with a P/BV ratio of 4.17 times, calculated using its Net Asset Value (NAV) of Rs 71.93 as of March 31, 2023. At the upper price cap, it is priced at a P/BV ratio of 2.56, considering its post-IPO NAV of Rs 117.07 per share.  

When assessing the EBITDA margins and PAT margins in comparison to its listed peers, Updater Services Limited has demonstrated a slightly superior performance. Additionally, the company has maintained a 3-year average Return on Equity (RoE) ranging from 13-14 per cent. 

When we compute the PE ratio for the company by considering adjusted FY23 earnings to the post-IPO fully diluted paid-up equity capital, the resulting PE ratio stands at 57. In its official documents, the company has identified Quess Corp Ltd, SIS Ltd, and Team Lease Services Ltd as its listed peers in the market. As of the latest available data, these peers are trading with price-to-earnings (PE) ratios of 38.7, 17.7, and 38.3, respectively. Hence, it appears that the issue is aggressively valued.  

Therefore, we recommend investors to avoid this, given its extremely high valuation and associated risks.