IPO: BLS E-Services

BLS E-Services, a digital services provider, will come out with its IPO (initial public offering) on January 30, 2024. Here's a breakdown of the company's strengths, weaknesses, and growth prospects to help investors make an informed decision.

In a nutshell

• Quality : Its three-year average return on equity (ROE) and return on capital employed (ROCE) are 39 and 30 per cent, respectively. Moreover, it generated positive cash flow from operations in each of the last three financial years.
  
• Growth : It has undertaken an acquisitive growth route to expand its operations in the last few years. It has acquired Zero Mass and BLS Kendra, and as a result, its revenue and profit after tax increased by 94 and 145 per cent annually during FY21-FY23.
  
• Valuation : The stock will be priced at a P/E and P/B of 65.0 and 2.8 times, respectively, as compared to its peer eMudhra, which trades at a P/E and P/B of 57.3 and 6.0 times.
  
• Overview : The government's focus on improving financial inclusion and strong relationship with PSU banks will help drive growth. However, the company is pursuing inorganic growth through acquisition, which may pose risks. In addition, intense competition from both organised and unorganised players are a threat.

About the company

BLS E-Services provides digital services, such as opening savings accounts or applying for Aadhar cards online, in semi-urban and rural areas with low internet penetration. It is a subsidiary of BLS International Services, which provides visa and passport processing services.

Strengths of BLS E-Services

• It offers a wide range of services , uncommon in the digital services industry.
  
• It is a highly asset-light business .

Weaknesses of BLS E-Services

• Revenue concentration. Its largest customer, which is a PSU (public sector undertaking) bank, accounts for 60 per cent of the revenue as of September 30, 2023, compared to 15 per cent in FY22. Issues with respect to cancellation of an agreement can have a significant impact on its operations.
  
• It operates in a highly competitive environment and faces competition from various organised and unorganised players.

Risk report

Company and business

• Are BLS E-Services' earnings before tax more than Rs 50 crore in the last 12 months?
  No. Its FY23 profit before tax was Rs 27 crore.
• Will BLS E-Services be able to scale up its business?
  Yes. The government's various initiatives to improve financial inclusion in rural and semi-urban areas will help it drive growth.
• Does BLS E-Services have recognisable brands with client stickiness?
  Yes. Its subsidiary, Zero Mass Private Limited (ZMPL), operates the largest business correspondent network for the State Bank of India, which is also its largest client. Moreover, SBI also holds around 6.8 per cent stake in this subsidiary.
• Does the company have a credible moat?
  No. It operates in a highly competitive market.

Management

• 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. Promoters' stake will be 68.9 per cent post-IPO.
• Do the top three managers have more than 15 years of combined leadership at BLS E-Services?
  No. While the company's non-executive director, Diwakar Aggarwal, has been the director since May 16, 2023, he has been associated with the BLS group of companies since 1991. He is also the chairman of BLS International Services (promoter of BLS E-Services).
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. No information to suggest otherwise.
• Is the company's accounting policy stable?
  Yes. No information to suggest otherwise.
• Is BLS E-Services free of promoter pledging of its shares?
  Yes. BLS E-Services is free of promoter pledging of its shares.

Financials

• Did the company 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. Its three-year average ROE and ROCE are 39 and 30 per cent, respectively. Its FY23 ROE and ROCE were 33 and 31 per cent, respectively.
• Was the company's operating cash flow positive during the last three years?
  Yes. It reported positive cash flows in each of the last three financial years.
• Is the company's net debt-to-equity ratio less than one?
  Yes. It is net cash positive as of September 30, 2023.
• Is BLS E-Services free from reliance on huge working capital for day-to-day affairs?
  Yes. It's a profitable business and has generated positive cash flows in each of the last three financial years.
• Can the company run its business without relying on external funding in the next three years?
  Yes. The business operates on an asset-light model and has low capital requirements. However, its inorganic growth strategy will remain a key monitorable in the future.
• Is BLS E-Services free from meaningful contingent liabilities?
  Yes. Contingent liabilities as a percentage of equity stood at 20 per cent as of September 30, 2023.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. The stock will offer a 2.6 per cent operating earnings yield on its enterprise value.
• Is the stock's price-to-earnings less than its peers' median level?
  No. The stock is valued at a price-to-earnings ratio of 65.0 times compared to its peers' level of 57.3 times.
• Is the stock's price-to-book value less than its peers' average level?
  Yes. The stock is valued at a price-to-book ratio of 2.8 times compared to its peers' level of 6.0 times.

Disclaimer: This is not a stock recommendation. Do your due diligence before investing.

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