The IPO of eMudhra opened for subscription on May 20, and is open till May 24. The issue size is ₹413 crore, out of which around ₹161 crore is a fresh issue.  The company is engaged in the business of providing Digital Trust Services (DTS) and Enterprise Solutions to individuals and organizations functioning in various industries.   

The DTS business is focused on the issuance of digital signature certificates or digital identities to websites, individuals, organizations or IoT devices in the form of cryptographic key pairs by Certifying Authorities (CA). eMudhra is one such licensed CA, and as per its RHP, it is the largest CA in India with a market share of 37.9 per cent in FY21. Its business in this segment encompasses issuing digital signature certificates, and SSL/TLS certificates.

Digital signature certificates are the digital equivalents of physical and paper certificates and are thus legally valid. They also help to authenticate the personal information of a user while transacting/conducting online business.  Today in India, many government related filings and transactions like income tax returns, GST, MCA filings, e-Auctions etc can be done using digital signature certificates. In the private sector it is used in industries such as banking, mutual funds and capital markets for purposes like customer onboarding. 

 SSL/TLS certificates ensure security of user information while in transfer between browser and servers (and vice versa), and also enable validation of domain names and the website’s organization identity to ensure users are interacting with legitimate website. 

Under its Enterprise Solutions segment, it offers a diverse portfolio of Digital Security (DS) and Paperless Transformation Solutions (PTS). DS includes providing identity, authentication and authorization solutions that enable enterprises to secure, manage and govern identities of their consumers, employees, partners and IoT. PTS is focused on enabling transformation of organizations to a paperless office. 

The company’s revenue is roughly split evenly between the two segments discussed above as of FY21. Since FY2019, DTS revenues have grown slower, while Enterprise Solutions segment has contributed to most of the growth since then (share of revenue increased from 35 per cent in FY19 to near 50 per cent in FY21. 

Financials and Valuation 

eMudhra reported revenue from operations of ₹137.2 crore and net profit of ₹30 crore for the 9M ended December 31, 2021. When this is annualized, it represents FY19-22 revenue and net profit CAGR of 21 and 20 per cent respectively. The FY19-21 CAGR  for both are 14 and 21 per cent respectively. Operating revenues have seen higher traction in the 9M FY22 period versus earlier periods and it needs to be seen how this plays out over the next few quarters to get clarity on what is the sustainable growth rate for the company. 

The offer is priced at ₹256 at the upper end of the price band (₹243-256). The market cap of the company at this price will be ₹1,999 crore.     

Annualising 9M FY22 numbers, this works out to a trailing PE valuation of around 50 times and EV/Sales of around 10 times. 

What should investors do 

While the business prospects for the company appears interesting in a world that is seeing strong traction in electronic ways of getting things done, the IPO pricing is expensive considering its growth in recent years. It is difficult to justify a PE of 50 times for a company that has seen earnings CAGR of around 20 per cent in recent years. Thus it depends a lot on how the growth over next few years can pan out. Investors interested in this business, can hence wait and watch. Factors to watch out for and assess are potential long term growth rates based on quarterly results of the company post listing and also how the industry evolves. Tech is a highly disruptive industry with newer ways of getting things done surfacing every few years. Continuing ability of the company to adapt to competition and rapid changes in technology must also be assessed. The past track record of the company indicates it has managed well so far in terms of adapting to changes in technology. 

In terms of peer comparison, there are not much listed pure play players in this space. Nasdaq listed Docusign with similar business exposure, trades at trailing EV/sales of 7.1 times. It was unprofitable till its recent concluded FY and hence there is no valid trailing PE. On one year forward basis it is trading at a PE of 37 times. It has however grown much faster than eMudhra, with FY19-22 revenue CAGR at 44 per cent. Its stock has had a volatile run from Feb 2020 to now. After moving up by more than 350 per cent from its pre-covid levels in the frenzy for tech stocks in the US as the pandemic bolstered prospects for certain themes in the sector, it is now down by around 75 per cent from peak levels reached last year.

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