What you must know about Kody Technolab IPO?

Kody Technolab Ltd was incorporated in the year 2017 and is engaged in the business of providing software development services for an array of different industries. Most of its software stack are in the more modern and growing versions of the IT industry. Its technology stack includes staff augmentation, ML (machine learning) development, AR (augmented reality) development and maintenance, enterprise mobility, CX strategy and design etc. To sum it up, the company offers the complete package of digital transformation and hand holds the customer through the life cycle of the digital transformation process. Apart from the above, it also offers as part of the stack; artificial intelligence (AI) robotics, IT consulting, Web App development and focused IOT (internet of things) support systems.

The IT industry in India has gone through 3 phases in the last 15 years. It first transformed from the traditional outsourcing for BFSI (banking, financial services, insurance) IT needs to a more digital environment. The digital environment comprised of SMAC (social media, mobility, analytics, and cloud). Now, Indian IT is mutating to the third stage which is the Digital Plus segment comprising of artificial intelligence, machine learning, Internet of Things, virtual reality, augmented reality etc. It is in this third phase that the company is positioned. It is still a small company with annual revenues of just about ₹11 crore but with a high net profit margin of nearly 30%. The company has been profitable for the last two years.

Key terms of the Kody Technolab IPO (SME)

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

• The issue opens for subscription on 15th September 2023 and closes for subscription on 20th September 2023; both days inclusive.
   
• The company has a face value of ₹10 per share and it is a fixed price issue. The issue price for the fixed price IPO has already been fixed at ₹160 per share. Since it is not a book built issue, there is not price discovery, as the price is already fixed in this case.
   
• The IPO of Kody Technolab Ltd has only a fresh issue component with no offer for sale (OFS) portion. 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 portion of the IPO, Kody Technolab Ltd will issue a total of 17,20,000 shares (17.20 lakh shares), which at the fixed IPO price of ₹160 per share aggregates to a total fund raising of ₹27.52 crore.
   
• Since there is no offer for sale portion, the total size of the fresh issue will also be the total size of the IPO. Hence the total IPO size will comprise of 17.20 lakh shares, which at the fixed IPO price of ₹160 per share will aggregate to ₹27.52 crore.
   
• Like every SME IPO, this issue also has a market making portion with a market maker portion allocation of 86,400 shares. The market maker for the issue is Spread X 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 Manav Patel, Manali Patel and Pooja Patel. The promoter holding in the company currently stands at 100.00%. However, post the fresh issue of shares and the OFS, the promoter equity holding share will reduce to 73.01%.
   
• The fresh issue funds will be used by the company for capex towards setting up a development centre at GIFT City, Gandhinagar, repayment of loans, working capital expenses of the company and also to meet general corporate expenses.
   
• While Beeline Capital Advisors Private Ltd will be the lead manager to the issue, KFIN Technologies Ltd will be the registrar to the issue. The market maker for the issue is Spread X Securities Ltd.

IPO allocation and minimum lot size for investment

The company has allocated 5.02% of the issue size for the market makers. The balance shares will be equally allocated between the retail investors and the non-retail investors. Here non-retail investors predominantly include the HNI / NII investors and partially the QIB investors also. However, there is no dedicated QIB quota available in the IPO of Kody Technolab Ltd. The break up in terms of minimum and maximum allowed quota has been captured in the table below.

The minimum lot size for the IPO investment will be 800 shares. Thus, retail investors can invest a minimum of ₹128,000 (800 x ₹160 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 1,600 shares and having a minimum lot value of ₹256,000. 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 Kody Technolab IPO (SME)

Kody Technolab IPO opens on Friday, September 15th, 2023 and closes on Wednesday September 20th, 2023. The Kody Technolab Ltd IPO bid date is from September 15th, 2023 10.00 AM to September 20th, 2023 5.00 PM. The Cut-off time for UPI Mandate confirmation is 5 PM on the issue closing day; which is September 20th, 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 Kody Technolab Ltd

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

Data Source: Company DRHP filed with SEBI

In the case of Kody Technolab Ltd it would only be instructive to look at the latest year since the company had only made a marginal profit in the previous year and it was still having negative net worth. Its ROE in the latest year is over 60% and the investors have to bet on whether such a net margin of over 30% and ROE of over 60% can be sustained in the coming years. For starters, the business model of the company is focused on the emerging digital transformation segment and that has a big demand opportunity. Hence, the deciding factor would be the share that the company can capture in this niche space.

The traditional P/E model becomes difficult to apply in the case of Kody Technolab Ltd as the company has delivered a relatively better performance only in the latest year. Also, the P/E equations change drastically if the current year is included but remain unattractive if the latest FY23 year is not included. One must also consider that bulk of the top line revenue growth has only come in FY23 and even the profit turnaround only happened in the latest fiscal year. The P/E ratio of 22 times earnings looks at par for this segment, but a lot will depend on how the top line and bottom line of the company pan out in the coming quarters. The business model is favourable for growth in the coming years and that should stand out as a major positive for the company. Investors can look at making small allocations to this IPO, more from the perspective of the future trajectory of its growth.