eMudhra IPO to raise up to Rs 413 crore opens tomorrow: Should you subscribe?

eMudhra Limited IPO opens for subscription on the 20th May. The company is looking to raise up to Rs 412.79 crore through the public issue. 

eMudhra Limited IPO Details:

eMudhra IPO Date: 20 May - 24 May 2022 

eMudhra IPO Price band: Rs 243 - Rs 256

eMudhra IPO Issue Size: Rs 412.79 crore (Fresh Issue of Equity shares aggregating up to Rs 161 crore and an Offer for sale of Rs 251.79 crore)

Reservation: QIB 50%, Retail 35%, NII 15%

Post Issue Implied Market Cap: Rs 1998.65 crore (on upper price band)

Minimum Investment: Rs 14,848

Bid lot: 58 shares, and in multiples of 58 shares

eMudhra Limited IPO: Objects of the Issue

The net proceeds from the IPO will be utilized for the following purposes:

• Repayment or pre-payment, in full or in part, of all or certain borrowings.
• Funding working capital requirements and expenditures relating to product development.
• Purchase of equipment and funding of other related costs for data centers proposed to be set up in India and overseas locations.
• General corporate purposes.

eMudhra: About the company

• eMudhra Limited is India's largest licensed Certifying Authority (CA). 
• They have a market share of 37.9% in the digital signature certificates market space in FY21.
• They are engaged in the business of providing Digital Trust Services and Enterprise Solutions to individuals and organizations functioning in various industries.
• eMudhra works closely with large government and banking customers like the 20+ public and private sector banks and state governments. 
• They have been identified and ranked amongst the 20 Most Promising Tech Solution Providers for Government & Public Sector 2019’ by CIO Review India.
• It is the only Indian company to be admitted as a member of the European Cloud Signature Consortium and Certifying Authority / Browser Forum.
• EMudhra has a strong digital signature certificate expertise and is the only Indian company to be directly recognized by renowned browsers and document processing software companies such as Microsoft, Mozilla, Apple, and Adobe.

Industry Outlook

• North America remains the largest in the Digital Security and Paperless Transformation market space. India is expected to be one of the fastest-growing markets at a CAGR of 27.5%, ahead of the developed economies.
• The Digital Trust Services market includes SSL/TLS certificates, Digital Signature Certificates, and IoT device certificates that have strong growth potential.
• Historically the market has grown at a CAGR of 20.1% from FY16 to FY21. The Digital Signature Certificates market has grown by 9.3% in the last 5 years. However, growth projections look strong till FY26 and are expected to grow at a CAGR of 13.4%. 

eMudhra Business Verticals

Digital Trust Services: They provide Digital Trust Services in the capacity of a Certifying Authority in India and internationally, through a Web trust accreditation.

Enterprise Solutions: Enterprise Solutions are either cloud-based or on-premise, which supports the DevOps-based deployment models allowing clients to have a rapid deployment of their solutions using continuous development, integration, and delivery process using tools such as Docker and Kubernetes.

Listed Peers

There are no listed companies in India that are comparable in all aspects of business and services that eMudhra provides. Accordingly, it is not possible to provide an industry comparison in relation to them.

Financials

• The company has reported revenue of Rs 101.68 crore, Rs 116.80 crore, and Rs 132.45 crore for FY19, FY20, and FY21. The revenue has grown at a CAGR of 13.8% in the last two financial years.
• For the same period, the net profit reported by the company is Rs 17.43 crore, Rs 18.42 crore, and Rs 25.36 crore, respectively. Profit has grown at a CAGR of 20% in the last two years.
• eMudhra has reported EBITDA for FY21, FY20, and FY19 at Rs 40.79 crore, Rs 32.29 crore, and Rs 32.31 crore, respectively, and grew at a CAGR of 12.36% over the same period.
• For FY19, FY20, and FY21, the revenue earned from the international business was Rs 10.20 crore, Rs 14.6 crore, and Rs 25.48 crore, respectively.
• For the last three financial years, the company reported an average EPS of Rs 2.45 and an average RoNW of 18.00%.
• The company's retail customers grew from 58,872 in FY19 to 115,905 in FY21. The enterprise customers grew from 249 in FY19 to 518 in FY21.
• Revenue from operations from the top five enterprises represented an increase from 12.14% in FY19 to 23.67% in FY20.

USPs

Largest licensed Certifying Authority in India: They are the largest licensed Certifying Authority in India with a market share of 37.9% in the digital signature certificate market space in FY21 having grown from 36.5% in FY20. They are also one of the largest players in the Indian Digital Trust Services market with a market share of 17.8%.

One-stop solution: They provide an integrated and complete product portfolio in secure digital transformation to enterprises, private customers, banks, financial institutions, and public customers such as government and administrative bodies, etc.

Technology backed infrastructure: Company's Digital Trust Services and Enterprise Solutions are backed by technological infrastructure including data centers located in India and proposed to be set up in overseas locations, with appropriate virtualization, computing and storage, physical and logical isolation, network firewalls, and disaster recovery site to support high availability, uptime, and redundancy.

Diverse, longstanding, and growing customer base: The company services marquee customers through its Digital Trust Services and Enterprise Solutions and has been able to form a portfolio of renowned customers in the private as well as public sectors. Some prominent names include Larsen & Toubro Infotech Limited, DB Schenker, JSW Steel Limited, Bharti AXA Life Insurance Company Limited, and many more.

Growth Potential

Capitalize on industry opportunities in India: Increasing threats to data security and the prevalent trend of working from home have opened up new opportunities for the digital security and the digital signature solutions industry. The company plans to further penetrate the domestic and international market and further expand and diversify its customer base to cater to diverse industries.

Leveraging existing data center infrastructure: With the growing need for digital signature services in the Indian and international markets, the company plans to invest in leveraging existing data center infrastructure and setting up new data centers.

Grow presence in overseas markets: There is a large opportunity for the company to leverage technology infrastructure and expand to international markets. The company plans to invest Rs 15.27 crore out of the Net Proceeds in its Subsidiary, eMudhra INC to augment its business development, sales, marketing, and other related costs for future growth.

Expand share of revenues among existing customers: The company plans to cater to new-age industries which are significantly more dependent upon an enhanced cybersecurity framework and would therefore require their trust and digital signature services regularly.

Risks

Ability to anticipate market needs: eMudhra's commercial success is largely dependent upon its ability to successfully anticipate market needs and utilize and manage its research and development resources and introduce new solutions that meet the end users’ needs on a timely basis. Any failure to do so will impact their business adversely.

Failure of expansion plan: As part of their growth strategy, they intend to expand their global footprint through their Subsidiaries which have been set up in the United States, United Arab Emirates, Netherlands, Singapore, Indonesia, and Mauritius. These are areas where the company has a limited operating history. It is not sure whether its expansion plan will be profitable. If not, it may affect their overall business.

Dependency on channel partners: For FY21, FY20, and FY19, the revenue from channel partners was 8.03%, 10.78%, and 14.02%, respectively of total revenues. There are no long-term agreements, and any loss of partners can affect their business.

eMudra IPO:

• Steady rise in revenues: eMudra has reported a 14% CAGR increase in revenues between FY19-21 to Rs 132 cr, aided by favorable industry dynamics. 
• Strong Profit growth: The profit has also grown at a robust 21% CAGR between FY19 - FY21, driven by good growth in customer base and partnerships. The company’s profit jumped to Rs 30 crore in the Apr-Dec 21 period. 
• Healthy margins: The company’s EBITDA margins have improved to 36.4% in Apr- Dec 21 period. The net profit margin have also stayed in a healthy range of 16- 22% over the last three years.  
• Reasonable valuations: At the higher end of the price band, eMudra IPO is priced at a PE ratio of ~49 times FY22 annualized EPS. The company does not have any listed peers.

Final recommendation: Given factors such as decline in revenue and profits, low margins, strong customer base, marquee clientele, and reasonable valuations, we remain “Positive” on the long-term prospects of this issue.