CapitalNumbers Infotech IPO analysis

CapitalNumbers Infotech IPO (initial public offering) will open for subscription on January 20, 2025, and close on January 22, 2025. Below is a breakdown of the SME (small and medium enterprise) company's strengths, weaknesses and growth prospects to help investors make an informed decision.

CapitalNumbers Infotech IPO in a nutshell

• Quality: During FY22-24, CapitalNumbers Infotech reported a three-year average ROE and ROCE of nearly 37 and 48 per cent, respectively.
  
• Growth: During FY22-24, its revenue and profit after tax grew by nearly 19 and 28 per cent per annum, respectively.
  
• Valuation: At the upper price band of Rs 263, the stock will be valued at a P/E and P/B ratio of around 25 and 4 times, respectively.
  
• Overview: Rising expenditure on IT infrastructure globally is expected to help CapitalNumbers Infotech scale up its business. However, factors such as low entry barriers and stiff competition may pose hurdles.

About CapitalNumbers Infotech

CapitalNumbers Infotech is a digital consulting and IT engineering company that provides software development solutions to other businesses. It primarily caters to international clients, with most of them coming from the US and UK. Presently, the company has a customer base of over 1,000 clients spread globally. As of H1FY25, CapitalNumbers Infotech had around 250 active clients across various industries, including e-commerce, retail, healthcare, etc.

Strengths of CapitalNumbers Infotech

• Wide customer base: CapitalNumbers Infotech boasts a large clientele of over 1,000 customers (as of H1 FY25). Of these, 250 are active clients.

Weaknesses of CapitalNumbers Infotech

• Revenue concentration: CapitalNumbers Infotech derives 50 and 20 per cent of its revenue only from the US and UK markets, respectively. Thus, a slowdown in their economies can negatively impact the company's financials.
  
• Highly competitive industry: Since CapitalNumbers Infotech operates in an industry with low entry barriers, it faces stiff competition from both new and established players, making it difficult for the company to consolidate its position in the market.

Risk report

Company and business

• Were CapitalNumbers Infotech's earnings before tax more than Rs 50 crore in the last 12 months?
  No. The company reported a profit before tax of Rs 34.5 crore for FY24.
• Will CapitalNumbers Infotech be able to scale up its business?
  Yes. Given that IT expenditures worldwide are expected to grow, CapitalNumber Infotech stands to benefit. Further, the company has plans to foray into new sectors and geographies, which should help it scale up its business.
• Does CapitalNumbers Infotech have recognisable brands with client stickiness?
  No. The company operates in a highly competitive industry with several new and established players.
• Does the company have a credible moat?
  No. This is because CapitalNumbers Infotech operates in an industry with low entry barriers, resulting in stiff competition, particularly from large and established players.

Management

• Do any of the company's founders still hold at least a 5 per cent stake? Or do promoters have over 25 per cent stake in the company?
  Yes. After the IPO, the promoters will hold a 73.6 per cent stake in the company.
• Do the top three managers have over 15 years of combined leadership experience at CapitalNumbers Infotech?
  No. CapitalNumber Infotech's top three managers do not have over 15 years of combined leadership experience.
• Is the company's management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. There is no information to suggest otherwise.
• Is the company's accounting policy stable?
  Yes. There is no information to suggest otherwise.
• Is CapitalNumbers Infotech free of promoters pledging their shares?
  Yes. The company is free of promoters pledging their shares.

Financials

• Did the company generate a current and three-year average ROE of more than 15 per cent and an ROCE of more than 18 per cent?
  Yes. Between FY22-24, CapitalNumbers Infotech's three-year average ROE and ROCE were around 37 and 48 per cent, respectively. In FY24, it reported an ROE and ROCE of nearly 41 and 51 per cent, respectively.
• Was the company's operating cash flow positive during the last three years?
  Yes. The company reported positive operating cash flows during the last three years.
• Is CapitalNumbers Infotech's net debt-to-equity ratio less than one?
  Yes, since the company is net debt-free.
• Is CapitalNumbers Infotech free from reliance on significant working capital for day-to-day affairs?
  Yes, as the business is less capital-intensive with no inventories involved. Moreover, the company has maintained decent receivable days of 25 as of FY24.
• Can the company operate its business without relying on external funding in the next three years?
  Yes. The business is less capital-intensive. The company is net debt-free and has generated positive cash flows over the last three years. Moreover, proceeds from the IPO should help the company to scale up its business without relying on external funding.
• Is CapitalNumbers Infotech free from meaningful contingent liabilities?
  Yes. The company has no contingent liabilities.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. The stock offers an operating earnings yield of 5.1 per cent on its enterprise value.
• Is the stock's P/E ratio less than its peers' median level?
  Yes. The stock is valued at a P/E ratio of 25 times compared to its peers' average level of 37 times.
• Is the stock's P/B value less than its peers' average level?
  Yes. The stock is valued at a P/B ratio of 4 times compared to its peers' average level of 5.2 times.

While SME IPOs offer growth opportunities, they demand careful evaluation, given their elevated risk profile. Since SMEs usually have a limited operating history, they are more prone to market swings than larger, more established firms. Further, their limited financial disclosures make it harder for investors to evaluate their long-term potential.

Moreover, SME stocks often experience lower trading volumes, leading to price volatility during transactions. Lastly, the lighter regulatory framework for SMEs may also present governance and compliance risks, making it riskier to invest in these companies.

Assessing an IPO requires carefully evaluating a company's strengths, weaknesses, and growth potential, just like we've outlined for CapitalNumbers Infotech. However, wealth creation can only be achieved through a well-researched, balanced stock portfolio.

Our Value Research Stock Advisor can help with that. What do you get? Meticulously researched stock recommendations and ready-to-invest portfolios, updated every month. Subscribe to Value Research Stock Advisor today and take charge of your financial future.

Disclaimer: This story is not a stock recommendation. Investors should do their due diligence before investing.

Also read: Should you invest in IPOs?