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IPO

Latent View Analytics IPO: Should you invest?

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Yet another busy IPO week is on us.

Three IPOs have opened this week – Paytm, Sapphire Foods, and Latent View Analytics. This comes after five companies successfully concluded their public offerings last week. Among the three IPOs that open this week, the Chennai-based data analytics services company – Latent View Analytics Ltd. – is looking for the least funds.

Data being the new oil and digital transformation accelerated by the pandemic fuelled the boom in the businesses of data analytics companies. But does that mean an investor should subscribe to the IPO?

Let’s find out…


Latent View’s (LVAL) initial public offering opens for three days on November 10. The company will be offering 3 crore equity shares (15% of equity) at a price band of ₹ 190 to ₹ 197.

The IPO is a combination of an offer for sale and a fresh issue. Promoter and employees/investors will be selling shares, while the fresh issue proceeds will be used by the company to grow the business and for acquisitions.

The promoter will be diluted to 68% in the initial public offering from 79%. After listing, the company will be valued at close to ₹ 3,900 crore.

Latent View Analytics IPO: Should you invest?

Business: Data-Driven

LVAL is a pure-play data analytics services company. Basically, the company extracts and analyses massive volumes of information with the help of technology to conclude the information. This helps businesses achieve valuable insights in many areas, which helps in decision making. Insights could be hidden patterns or unknown correlations within the data or emerging market trends and customer preferences.

Through its services, the company aims to increase revenue generation opportunities, improve efficiency, reduce costs and increase competitiveness.

For instance, data analytics can help retailers better understand customers and the most effective ways to keep them coming back. Manufacturers can solve problems faster and make more agile business decisions, and bankers can use it to minimise risk and fraud.

LVAL classifies businesses into:-

  • Consulting services – that involves understanding relevant business trends, challenges, and opportunities and preparing a roadmap of data and analytics initiatives that addresses them,
  • Data engineering – that is undertaken to design, architect, and implement the data foundation required to undertake analytics,
  • Business analytics – that delivers analysis and insights for clients to make more accurate, timely, and impactful decisions, and
  • Digital solutions – that they develop to automate business processes, predict trends, and generate actionable insights.

Latent View Analytics IPO: Should you invest?

It provides services primarily to technology, consumer goods, retail, industrials, and BFSI industries. They serve clients across countries in the U.S., Europe, and Asia. In the last three years, it has worked with over 30 of the Fortune 500 companies. Some of the key clients include Adobe, Uber Technology, and 7-Eleven.

Over FY19-21, not only the total number of clients has declined, but even its customer stickiness. In FY19, the company generated 80% of its revenue from clients they had served for more than 5 years. This has now declined to 45%.

Latent View Analytics IPO: Should you invest?

Financials: Cash Heavy

The net worth of the company, as of June 30, 2021, was ₹ 462 crore. However, the company will raise ₹ 474 crore in IPO, and if the same is successful, its net worth will increase to ₹ 936 crore. It will translate to a book value of ₹ 47 per share on a diluted basis.

LVAL had a debt of ₹ 67 crore and ₹ 429 crore of cash and cash equivalents on its book as of June 30, 2021. We have also considered fixed deposits with a maturity of more than 12 months and non-current investments in government bonds a part of cash for practical purposes. The majority of debt on its book is short-term in nature – working capital and bank overdraft. Of the total debt, ₹ 22 crore is related to the Paycheck Protection Program of the US Federal Government in the wake of Covid. This debt is eligible for forgiveness, and the company has already applied.

Currently, LVAL’s balance sheet size is ₹ 588 crore, 73% in cash and cash equivalents. Post fundraise, the balance sheet size will be ₹ 1,062 crore, with 85% cash. The cash value per share post will be close to ₹ 46.

Latent View Analytics IPO: Should you invest?

Over FY19-21, LVAL’s revenue growth has been muted, but EBITDA and net profit has been strong largely because of lower cost and higher other income. Over FY19-21, the company’s revenue/EBITDA/net profit grew at a CAGR of 3%/20%/24%, respectively.

The reason behind lower revenue growth is partially Covid led disruption. The other reason, according to management, is that in recent years the business focus has been re-oriented to focus on higher-end analytics business and de-emphasising on businesses that were of higher volume but lower value-add to the clients. However, according to the bankers, the growth reported in Q1FY22 gives a true indication of how growth is after the above-mentioned changes.

Latent View Analytics IPO: Should you invest?

Other income was higher due to large interest income, while overall costs were lower due to a cut in employee cost and lower travelling cost. Employee cost is the biggest cost item for LVAL. Also, we are yet to see any leverage as the revenue and EBITDA per employee are largely the same.

Latent View Analytics IPO: Should you invest?

Peers: Too Many

As a pure-play analytics firm, the company has no listed peers. However, it competes with many large multi-service IT service providers and small pure-play analytics players.

Latent View Analytics IPO: Should you invest?

Valuations

The post-IPO valuation appears to be expensive at the upper end of the price band – ₹ 197. Valuations are expensive compared to tier-1 IT service companies but cheaper when compared to tier-2 IT services companies.

Latent View Analytics IPO: Should you invest?

Final Thoughts

LVAL is a pure-play analytics company, and off-late data analytics have gained a lot of traction. The company competes with established players having a mix of legacy and digital business and many other pure-play analytical companies who are more inclined to gain market share. One such example is Fractal Analytics – three times the size of LVAL – which has not been profitable every year but has a considerable market share and is also looking to go public. Currently, the company is generating healthy margins of 30%. However, whether the same will remain sustainable is highly doubtful.

Employee cost is the biggest expense for the company, which will be the case as it is highly an employee-driven business. Churn rates could be high and could have an impact on the revenue. Although not unusual for smaller companies, it is still the biggest risk factor – high client concentration. LVAL generates more than 55% of its revenue from its top five clients consistently. More so, the revenues are even geographically concentrated. It has most of its revenue from the US, and any slowdown could impact LVAL.

Despite being free cash flow positive, the company has not distributed dividends in the last three years. Despite having a good amount of cash on its book, the company is still raising funds. This should be to support LVAL’s aggressive organic and inorganic future expansion. However, aggressive expansions can even go wrong.

The company is in data analytics services and has created a niche place. Also, it is the first pure-play data analytics company to get listed on the Indian exchanges. Along with this, as mentioned earlier, data is the new oil, and the fact that data analysis is gaining momentum globally, LVAL could see a fancy listing. Thus, for now, we would advise investors to subscribe for the IPO only from a listing gains perspective. To consider the stock from a long-term perspective, we would want to wait and watch how its earnings pan out after listing.


Other recent IPO’s we reviewed:-

Paytm IPO: Should you invest in India’s biggest IPO?

Policybazaar IPO – A direct play on Insurance-tech. Should you invest?

Nykaa IPO: All you need to know before investing

Manyavar IPO: Will investors find the right fit?

The IPO rush: Lessons from the past


This article is for information only and should not be considered as a recommendation to buy or sell any stocks.

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