Updater Services IPO: Should you subscribe? Here's everything you need to know

The ₹640 crore initial public offering (IPO) of Updater Services opened for bidding on Monday, September 25 and the bidding for the issue will conclude on Wednesday, September 27. The company has set a price band in the range of ₹280-300 apiece.

Issue size: The issue includes a fresh share sale of ₹400 crore, while its 80 lakh equity shares aggregating to ₹240 crore are offered via offer-for-sale (OFS) route.

Objective: Proceeds from the fresh issue shall be utilised towards repayment and/or prepayment of borrowings; funding the working capital requirements; pursuing inorganic initiatives; and general corporate purposes.

Subscription status: The issue received a weak response from investors. At 2:10 pm on its second day of bidding, the IPO was subscribed to just 13 percent against its offer. It has received bids for 15.33 lakh shares against 1.17 crore shares on offer. The category for retail investors was bid the most, 56 percent, followed by that of non-institutional investors (NII), which was subscribed to 11 percent. However, the qualified institutional buyers (QIBs) portion has not received any bids till now.

GMP: UDS shares are commanding a premium of 0 apiece in the grey market today, indicating a flat listing, the same as the IPO price.

However, it is important to note that grey market premiums are just an indicator of how the company's shares are stacked up in the unlisted market and are subject to change rapidly.

Reservation: Up to 75 percent of the offer of Updater Services shall be reserved for the qualified institutional bidders, while non-institutional investors (NIIs) will get 15 percent of the allocation. Retail investors will get the remaining 10 percent of the issue.

Lot size: Investors can bid for a minimum of 50 equity shares and multiples of 50 thereof. Hence the minimum investment by retail investors would be ₹14,000.

Anchor investors: Updater Services raised ₹288 crore from 18 anchor investors by allocation of 96 lakh equity shares at a price of ₹300 per share on Friday. Anchor books included marquee names like Societe Generale, Copthall Mauritius Investment, Citigroup Global, BNP Paribas Arbitrage - ODI and Nomura Singapore.

About the firm: Incorporated in 1990, Updater Services (UDS) is a leading, focused, and integrated business services platform in India offering integrated facilities management (IFM) services and business support services (BSS) to their customers, with a pan-India presence. It is the second-largest player in the IFM market in India and has the widest service offering in the industry, making it a unique and differentiated player in the market.

The company served 2,797 customers across various sectors at domestic and global levels as of June 30, 2023. Its client base includes Procter & Gamble Home Products (P&G), Microsoft, Aditya Birla Fashion and Retail (ABFRL), Hyundai Motor India, and Saint-Gobain India. It has a widespread network of 4,331 locations via 116 offices situated in India and 13 offices situated overseas.

Financials: The company reported a net profit of ₹34.6 crore for the year ended March 2023, down 40 percent as compared to ₹57.37 in the previous financial year, impacted by weak operating performance. However, its revenue jumped 41.3 percent to ₹2,112.09 crore in FY23 versus ₹1,497.89 crore in FY22. The firm's consolidated debt stood at ₹176.54 crore as of March 2023.

Overall, UDS' revenue CAGR is approximately 32 percent over FY21-23. The company operated on an EBITDA margin of 4.75 percent and PAT margin of 1.64 percent for the year ended FY23, generating an ROE and ROCE of 9.4 percent and 14.17 percent respectively for FY23.

Book-running managers: Motilal Oswal Investment Advisors, IIFL Securities, and SBI Capital Markets are the book-running lead managers for the issue, while Link Intime India has been appointed as the registrar to the issue.

Important dates: The company will fix the basis of IPO allotment on October 4 and initiate refunds on October 5, while the credit of shares to the Demat account of eligible allottees will take place on October 6.

UDS shares are likely to be listed on October 9 on stock exchanges BSE and NSE.

Brokerage Views

Brokerages were mixed on the issue. While some recommended subscribing to the IPO for the long term on the back of a marque client base, operational efficiency, healthy margins, and strong outlook; other brokerages are cautious due to its expensive valuations. Let's see what different brokerages have to say.

Anand Rathi: Subscribe - Long term

At the upper price band company is valuing at a P/E of 57x with a market cap of ₹2,001 crore post-issue of equity shares and a return on net worth of 9.4 percent. Through the marque clients, past acquisitions, and operational efficiency, the company has successfully created a niche place in services. Moreover, the company has aimed for high margin through value-added services with the support of the latest technology in its portfolio. On the valuation front, we believe that the company is fairly priced. Thus, we recommend a 'Subscribe – Long Term' rating for the IPO.

Canara Bank Securities: Subscribe - Long Term

The company is a leading, focused and integrated business services platform in India offering integrated facilities management and business support services to customers across India. The company is the 2nd largest player in integrated facilities management (IFM), which includes soft services, production support services, engineering services, washroom and feminine hygiene care and has contributed around 72 percent of the total revenues backed by strong clientele across diverse sectors.

The company is looking to increase its customer base with the expansion of key segments and introduce new products and services catering to existing and new customers. The company is also looking to pursue inorganic growth through the acquisition of high-margin businesses with the expansion of standalone margin. However, the company looks expensive vis a vis its peers in terms of valuation. Hence, we recommend to subscribe the issue for the long term.

BP Equities: Avoid

If we attribute FY23 earnings to the post-IPO fully diluted paid-up equity capital of the company, the asking price is at a P/E of 44.8x, and we believe it to be priced aggressively. We, therefore, recommend an “Avoid” rating for the issue. However, we would reassess the company on improvement in financial metrics over a sustained period.

Sushil Finance: Not Rated

The company is asking for a PE multiple of 44.77x on the upper end of the price band and using diluted EPS for FY 2023 ( ₹6.7), whereas the industry average P/E is around 27, the issue seems to be a little expensive. However, improvement was seen in the topline but the bottom line was fluctuating through FY21-23. At the same time, the trade receivables of the company doubled which raises a concern. Outsourcing various non-core business activities by companies to third parties is rapidly evolving. Also, it is planning to expand its global presence. Thus, looking at both opportunities and risks involved in the business, we are neutral on the company.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie. We advise investors to check with certified experts before taking any investment decisions.