What you must know about Canarys Automations IPO?

Canarys Automations Ltd was incorporated in 1991, to offer specialized IT solutions in the area of digitization, automation, and intelligence. The company broadly operates in 2 business verticals. The first vertical is the Technology Solutions Vertical. This vertical essentially is the core of the business and offers DevOps Consulting (Azure, GitHub, Atlassian, GitLab, etc.), Cloud Consulting (Azure, AWS, GCP), Digital Enterprise Solutions using SAP, MS Dynamics 365, RPA, Digital Applications, as well as Mobility Solutions. The second key vertical is the Water Resource Management Solutions vertical. Here, the company offers automation solutions to modernize irrigation water conservation and improve water use efficiency. It also offers flood risk assessment and SCADA gate control systems. It caters to sectors like BFSI, retail, healthcare, and manufacturing. It has offered solutions to over 1,000 customers in India as well as major countries like the US, the UK, Canada, Germany, Singapore, Malaysia, Australia, and Indonesia.

Key terms of the Canarys Automations IPO SME

Here are some of the highlights of the Canarys Automations IPO on the SME segment of the National Stock Exchange (NSE).

• The issue opens for subscription on 27th September 2023 and closes for subscription on 03rd October 2023; both days inclusive.
   
• The company has a face value of ₹2 per share and it is a Book Built issue. The issue price band for the IPO has been set in the range of ₹29 to ₹31 per share. The final price will be discovered through the process of book building.
   
• The IPO of Canarys Automations Ltd has only a fresh issue component and no offer for sale (OFS) component in the IPO. It must be remembered that the fresh issue portion is EPS dilutive and equity dilutive, but OFS is just a transfer of ownership and  hence it is not EPS or equity dilutive.
   
• As part of the fresh issue portion of the IPO, Canarys Automations Ltd will issue a total of 1,51,72,000 shares (151.72 lakh shares). At the upper band of the IPO price of ₹31 per share, the total value of the fresh issue portion aggregates to ₹47.03 crore.
   
• Since there is no offer for sale portion, the fresh issue will also be the total size of the issue. As a result, the total issue size of Canarys Automations Ltd will also entail the issue and sale of 1,51,72,000 shares (151.72 lakh shares). At the upper band of the IPO price of ₹31 per share, the total size of the IPO of Canarys Automations Ltd will be₹47.03 crore.
   
• Like every SME IPO, this issue also has a market making portion with a market maker inventory allocation of 7,60,000 shares. The market maker for the issue will be Alacrity Securities Ltd and they will provide two-way quotes to ensure liquidity on the counter post listing and low basis costs.
   
• The company has been promoted by Metikurke Ramaswamy Raman Subbarao, Danavadi Krishnamurthy Arun, Raghu Chandrashekhariah, Sheshadri Yedavanahalli Srinivas, Pushparaj Shetty, and Nagaraju Vineeth. The promoter holding in the company currently stands at 77.49%. However, post the fresh issue of shares, the promoter equity holding share will get diluted to 56.56%.
   
• The fresh issue funds will be used by the company for funding of capex, creation of a new delivery centre, funding the working capital gaps and for general corporate purposes.
   
• While Indorient Financial Services Ltd will be the lead manager to the issue, Link Intime India Private Ltd will be the registrar to the issue. The market maker for the issue will be Alacrity Securities Ltd.

IPO allocation and minimum lot size for investment

Out of the total shares on offer, the company has allocated 7,60,000 shares for the market maker for providing liquidity post listing and reducing basis risk. The net offer (net of market maker allocation) will be distributed between the QIBs, retail investors and the HNI / NII investors. The table below captures the gist of the IPO allocation to various categories.

Data Source: RHP filed with SEBI

The minimum lot size for the IPO investment will be 4,000 shares. Thus, retail investors can invest a minimum of ₹124,000 (4,000 x ₹31 per share) in the IPO. That is also the maximum that the retail investors can invest in the IPO. HNI / NII investors can invest a minimum of 2 lots comprising of 8,000 shares and having a minimum lot value of ₹248,000. There is no upper limit on what the QIBs as well as what the HNI / NII investors can apply for. The table below captures the break-up of lot sizes for different categories.

Key dates to be aware of in the Canarys Automations IPO (SME)

The SME IPO of Canarys Automations Ltd IPO opens on Wednesday, September 27th, 2023 and closes on Tuesday, October 03rd, 2023. The Canarys Automations Ltd IPO bid date is from September 27th, 2023 10.00 AM to October 03rd, 2023 5.00 PM. The Cut-off time for UPI Mandate confirmation is 5 PM on the issue closing day; which is October 03rd, 2023.

It must be noted that in ASBA applications, there is no refund concept. The total application amount is blocked under the ASBA (applications supported by blocked amounts) system. Once the allotment is finalized, only the amount is debited to the extent of the allotment made and the lien on the balance amount is automatically released in the bank account.

Financial highlights of Canarys Automations Ltd

The table below captures the key financials of Canarys Automations Ltd for the last 3 completed financial years.

Data Source: Company DRHP filed with SEBI

The company has reported net margins of around 10% on a consistent basis in last 3 years and the sales growth has also been impressive. The ROE of the company has been in the vicinity of around 25% to 30%, which his quite impressive for this line of business. More importantly, the company has maintained its asset sweating ratio at above 1. The company has a stable business model and a stream of client orders, both from India and abroad.

The traditional P/E model pegs the valuation of the stock at around 6X to 7X earnings, which is a fairly attractive P/E ratio. The downside risks look to be limited at such a valuations and the financials and margins are also in place. The business model is a mix of domestic and global flows, so there is also a hedge to the business cycles. Investors may have to take a slightly longer term view of more than a year and be prepared for a higher risk appetite. That should work for the IPO.