What you must know about Digikore Studios IPO?

Digikore Studios Ltd was incorporated in the year 2000 and is one of the leading visual effects studios in India offering the complete suite of visual effects services to its clients. In terms of its value proposition, Digikore Studios Ltd offers Visual Effects (VFX) services for films, web series & OTT, TV serials & programs, documentaries, and commercials. Some of the notable works delivered by Digikore Studios Ltd till date include some very popular properties like Thor: Love and Thunder, Black Panther: Wakanda Forever, Glass Onion: A Knives Out Mystery, Deadpool, Star Trek, Jumanji, Stranger Things, The Last Ship, Titanic, Gosht Rider: Spirit of Vengeance, Transformers: Age of Extinction, Crouching Tiger, and a lot more. Its clients for the VFX franchise are spread across India, Australia, New Zealand, the US, and the Euro Zone. It is a niche business where the specialized skills that India brings to the table, combined with relatively lower costs, proves to be a winning proposition.

Key terms of the Digikore Studios IPO (SME)

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

• The issue opens for subscription on 25th September 2023 and closes for subscription on 27th September 2023; both days inclusive.
   
• The company has a face value of ₹10 per share and it is a book building issue. The price band for the book built IPO has been fixed in the range of ₹ 168 to ₹171 per share. Since it is a book built issue, the eventual price will be discovered through book building.
   
• The IPO of Digikore Studios Ltd has a fresh issue component and also an offer for sale (OFS) portion. It must be mentioned here 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, Digikore Studios Ltd will issue a total of 12,60,800 shares (12.61 lakh shares approximately), which at the upper band of the IPO price range of ₹171 per share aggregates to a total fund raising of ₹21.56 crore.
   
• As part of the offer for sale (OFS) portion of the IPO, there will be a total sale of an equivalent 5,21,600 shares (5.22 lakh shares approximately), which at the upper IPO price band of ₹171 per share aggregates to a total OFS size of ₹8.92 crore. The entire OFS sale of 5.22 lakh shares will be done by the promoter of the company, M/S Shree MPJ Cement Works LLP.
   
• As a result, the total issue size of Digikore Studios Ltd will entail the issue and sale of 17,82,400 shares (17.82 lakh shares approximately), which at the upper IPO price band of ₹171 per share aggregates to a total fund raising of ₹30.48 crore.
   
• Like every SME IPO, this issue will also have a market making portion with a specified allocation of shares. While the number of shares and the name of the market maker are yet to be announced, the generally practice is to allocate about 5% of the issue for market makers, who will offer two-way quotes to impute liquidity in the counter.
   
• The company has been promoted by Abhishek Rameshkumar More and M/S Shree MPJ Cement works LLP. The promoter holding in the company currently stands at 93.38%. However, post the fresh issue of shares and the OFS, the promoter equity holding share will get diluted to 66.55%.
   
• The fresh issue funds will be used by the company for meeting its working capital needs and for general corporate expenses. Part of the funds will also be applied towards the cost of the fund raising.
   
• While Sarthi Capital Advisors Private Ltd will be the lead manager to the issue, Bigshare Services Private Ltd will be the registrar to the issue. The market maker for the issue is yet to be announced, as is the market making quota.

IPO allocation and minimum lot size for investment

Out of the total shares on offer, the company is yet to decide on the allocation to market makers to provide two way liquidity on the counter. Normally, the market maker quota is around 5% of the total issue size. The table below captures the allocation percentages for the net offer (net of market making quota).

The minimum lot size for the IPO investment will be 800 shares. Thus, retail investors can invest a minimum of ₹136,800 (800 x ₹171 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 ₹273,600. 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 Digikore Studios Ltd IPO (SME)

The SME IPO of Digikore Studios IPO opens on Monday, September 25th, 2023 and closes on Wednesday, September 27th, 2023. The Digikore Studios IPO bid date is from September 25th, 2023 10.00 AM to September 27th, 2023 5.00 PM. The Cut-off time for UPI Mandate confirmation is 5 PM on the issue closing day; which is September 27th, 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 Digikore Studios Ltd

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

Data Source: Company DRHP filed with SEBI

Here are some key takeaways from the financial numbers of Digikore Studios Ltd as captured below.

• The company has reported net margins of 10% in the current year, whereas in previous years the net margins are not exactly comparable due to the low revenue and profit base. On the back of the low revenue base effect, the sales have multiplied nearly 6-fold in the last 2 years between FY21 and FY23.
   
• The return on equity has shown a marked improvement in the last two years and it is above 35% in the last two years on an average. That is the key to a knowledge intensive business like VFX and should help support valuations.
   
• The company looks attractively priced if you look at the latest full year EPS of ₹36.95 and even if you look at the weighted average EPS of ₹19.81 of last 3 years. In either cases, the P/E ratio is under 10, which leaves room for upsides.

It is an interesting stock in an interesting business with a larger global franchise. The growth has been rapid in the last 2 years, albeit on a smaller base. With robust ROE and margins, the valuations are also reasonable. Investors can look at the issue, but only if they have a higher risk appetite and a longer term perspective.