By Vivek Ananth
Before the newearnings season gets underway, we have another initial public offering fromTracxn Technologies. The company provides data services and analytics on private companies to investors like venture capital firms, private equity funds, investment banks, as well as corporates and government agencies.
The company provides these services through its subscription-based platform—Tracxn. It earns nearly 70% of its revenues from abroad and the balance from India.
The IPO is an offer for sale of up to Rs 309 crore, in which its promoters Neha Singh and Abhishek Goyal are selling shares worth up to Rs 122.6 crore. The other selling shareholders include venture capital firms Elevation Capital, Accel, and Sequoia, and Flipkart founders Sachin Bansal and Binny Bansal. The IPO is open from October 10-12 with a price band of Rs 75-80.
Investors should note that in the past three completed financial years, Tracxn hasn’t made a profit despite its revenue growing at a CAGR of 19.4%. This growth in revenue coincided with a surge in investments in the Indian start-up space over the past couple of years. In Q1FY23 the company eked out a Rs 83.6 lakh profit compared to a Rs 72 lakh loss in Q1FY22.
If we take the annualised equivalent (for FY23) of the Q1FY23 profit number, the company is valued at 285 times the expected FY23 earnings. If we take other valuation methods, it’s valued at nearly 35 times its book value at the end of Q1FY23, and nearly 11 times its annualised FY23 revenue.
The company’s valuation is high, and the fact that Tracxn doesn’t have any comparable listed peer in India makes evaluating this number a little tricky. It counts firms like CB Insights, Pitchbook, and Crunchbase as its competitors, none of which are listed.
Does the company’s underlying business justify this ask?
Cash flows turn positive in FY22 as does its return ratio
Even though the company didn’t make profits in the past three completed financial years, and only recently started generating free cash flows, the management says the company has enough cash on the books. Out of the Rs 113 crore funds the company raised from investors since its inception nearly 10 years ago, it still has around Rs 43 crore on its books.
At the end of FY22, the company generated around Rs 56 lakh cash from its operations, and around Rs 40 lakh of free cash flow. In the three months that ended June 2022, it has already generated Rs 1.5 crore in free cash flow.
This shows that the investments made in building up its platform are finally generating cash consistently. But investors will have to wait and see if this is sustainable over a longer period. For context, the company generated an EBITDA margin of merely 1.01% during Q1FY23 (vs 7.65% in Q1FY22).
Also, the company did generate a positive return on net worth in Q1FY23, but this number is quite small compared to so many other listed companies in India.
The management believes that the business is generating enough cash, which will help sustain investments for future growth. This can be gleaned from the numbers presented in its red herring prospectus. But in the Internal Risk Factors section of its prospectus, Tracxn says that it may need to raise funds in the future through equity shares or debt to “continue to grow” its business.
A good long-term bet, but…
The private market data services provider space will continue to grow. This market is expected to grow to $3.28 billion globally by 2025 from $2.52 billion at the end of 2021, according to a Frost & Sullivan analysis included in Tracxn’s red herring prospectus.
The company has lower costs than similar service providers globally, which will allow it to compete in the marketplace. But competition is intensive and there are always newer players entering this space. The management believes it has a decent enough moat to withstand any new entrants.
8 of its top 10 customers have been with the company for more than three years (for FY22), and 23.44% of its customer accounts have been using the platform for over three years. This indicates some stickiness in its customer base. At the end of Q1FY23, its customer retention ratio was 73.61% compared to 81.82% at the end of Q1FY22.
The company plans to continue to grow its account base from 1,139 at the end of Q1FY23. It expects to achieve this through event partnerships with media and industry events. It will continue its content-based marketing efforts to build its brand’s awareness.
Still, the valuation hardly leaves any money on the table for investors.
This analysis by Trendlyne is meant for investor education - to help understand companies and make informed investment decisions on their own. It should not be considered an investment recommendation.