In our previous part of Prudent Corporate IPO story, we read about the key details of the IPO. Here we will answer some questions about Prudent Corporate and evaluate it on parameters like management, financials, valuations, etc.
1) Are the company's earnings before tax more than Rs 50 crore in the last 12 months?
Yes. The company's earnings before profit were Rs 60.5 crore in FY21.
2) Will Prudent Corporate be able to scale up its business?
Yes. Given the significant under penetration in mutual funds, the increasing share of national distributors in mutual funds distribution and the large presence of the company, it will be able to scale up its business.
3) Does the company have recognisable brands truly valued by its customers?
Yes. Prudent Corporate leverages its 'Prudent' brand to offer technologically driven solutions through its platforms 'FundzBazar', 'PrudentConnect', 'Policyworld', 'WiseBasket', 'Prubazar' and 'CreditBasket'.
4) Does Prudent Corporate have high repeat customer usage?
Yes. The company receives regular SIP inflows from retail investors and moreover, the MFDs bring many customers to the company's platform.
5) Does the company have a credible moat?
No. Although the company has strong brand recognition, several other well-recognised distributors offer similar products and enjoy a bigger slice of the pie.
6) Is the company sufficiently robust to major regulatory or geopolitical risks?
No. The company is susceptible to regulatory rulings that reduce the total exchange ratio of mutual funds, which in turn, could reduce the company's revenue.
7) Is the company's business immune to easy replication by new players?
No. New players can and have entered the market. Those with technologically advanced offerings can hurt the company's operations.
8) Can the company's product withstand being easily substituted or outdated?
No. With the increasing use of technology and the ease of investing it brings, retail investors (existing and potential clients) may choose to invest directly in mutual funds. This would render the company's platform redundant.
9) Are the customers of Prudent Corporate devoid of significant bargaining power?
Yes. As the company is a national distributor with a pan-India presence, it enjoys a higher bargaining power with AMCs. This leads to a higher commission payout to the company, and therefore, the commission payout to the MFDs (customers of the company) is either in-line or slightly higher than the commission earned by them while operating as a standalone entity. Thus, being associated with Prudent Corporate is beneficial to the MFDs.
10) Are the suppliers of Prudent Corporate devoid of significant bargaining power?
No. While being a pan-India national distributor does provide a higher bargaining power, the risk of regulatory actions caps the commission income that can be earned by the company.
11) Is the level of competition the company faces relatively low?
No. The company operates in a highly competitive space with various domestic players.
12) Do any of the company's founders still hold at least a 5 per cent stake in the company? Or do promoters hold more than a 25 per cent stake in the company?
Yes. Post-IPO, the promoter and promoter group will hold about a 56.8 per cent stake in the company.
13) Do the top three managers have more than 15 years of combined leadership at the company?
Yes. Chairman and Managing Director Sanjay Shah (also the promoter) has been associated with the company since its incorporation in 2003.
14) Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
Yes, we have no reason to believe otherwise.
15) Is the company free of litigation in court or with the regulator that casts doubts on the management's intention?
No. The company's erstwhile subsidiary, Prudent Comder (now merged with Prudent Broking Services), is under the lens of SEBI for not maintaining proper standards regarding trading in 'paired contracts' while the company was a member of the National Spot Exchange of India. The company has denied the allegation, however, SEBI has recommended cancelling the certificate of registration of the company as a commodity derivatives broker. The matter is currently pending adjudication.
16) Is the company's accounting policy stable?
Yes, the company's accounting policy is stable.
17) Is the company free of promoter pledging of its shares?
Yes. The company's shares are free of any pledge.
18) Did Prudent Corporate generate a current and three-year average return on equity of more than 15 per cent and a return on capital employed of more than 18 per cent?
Yes, the company managed to generate a three-year (FY19-21) average return on equity of 29.1 per cent and a return on capital employed of 36.6 per cent. For FY21, the company generated a return on equity of 33.5 per cent and a return on capital employed of 44.3 per cent.
19) Was the company's operating cash flow positive during the last three years?
Yes, the company has reported positive operating cash flow during the last three years.
20) Did Prudent Corporate increase its revenue by 10 per cent CAGR in the last three years?
Yes. The company's revenues increased from Rs 222 crore in FY19 to Rs 286.5 crore in FY21 at a CAGR of 13.6 per cent.
21) Is the company's net debt-to-equity ratio less than one, or is its interest-coverage ratio more than two?
Yes. The company was debt-free on a net-debt basis. Interest coverage stood at 37.6 times for FY21.
22) Is the company free from reliance on huge working capital for day-to-day affairs?
Yes. Prudent Corporate funds its operations primarily through operating cash flows.
23) Can the company run its business without relying on external funding in the next three years?
Yes. The company's business is asset-light in nature and doesn't require high capital expenditures. Also, it generates sufficient operating cash flows.
24) Have the company's short-term borrowings remained stable or declined (not increased by greater than 15 per cent)?
No. The company's short-term borrowings have increased from Rs 2.6 crore in FY21 to Rs 33 crore as of December 2021.
25) Is the company free from meaningful contingent liabilities?
Yes, the company is free from meaningful contingent liabilities.
26) Does the stock offer an operating-earnings yield of more than 8 per cent on its enterprise value?
No, the stock will only offer an operating-earnings yield of 2.4 per cent on its enterprise value.
27) Is the stock's price-to-earnings less than its peers' median level?
No. Post-IPO, the company's stock will trade at a P/E of around 57.6, which is more than its peers' median P/E of 16.6.
28) Is the stock's price-to-book value less than its peers' average level?
No. Post-IPO, the company's stock will trade at a P/B of around 12.1, which is more than its peers' average P/B of 5.2.
Also, read our earlier story on Prudent Corporate IPO to learn about key IPO details and important company information.
Disclaimer: The author may be an applicant in this Initial Public Offering.