IPO: Netweb Technologies India

Netweb Technologies India, a leading high-end computing solutions provider, is open to subscription from July 17 to July 19, 2023. Here's a breakdown of the company's strengths, weaknesses, and growth prospects to help investors make an informed decision.

In a nutshell

• Quality : Netweb Technologies India's three-year average return on equity (ROE) and return on capital employed (ROCE) are 60.8 and 50.5 per cent, respectively. Moreover, the operating profit margins have also improved during the FY21-23 period.
  
• Growth : Netweb Technologies grew its revenue by 80.1 per cent and 73.0 per cent in FY23 and FY22, respectively, mainly due to an increase in demand for high-performance computing solutions. In addition, the increased application of both AI and supercomputers in faster data processing will further support growth.
  
• Valuation : There are no listed peers. But Netweb Technologies has used electronics manufacturing service providers as a proxy for valuation purposes. The stock will be priced relatively lower as compared to its peers in terms of both P/E and P/B ratios.
  
• Overview : Netweb Technologies is one of India's leading high-end computing solutions providers. It has demonstrated growth due to rising demand for faster speed data solutions. As the markets are converging towards more AI-enabled tech for fast data processing, the company has good growth prospects. However, large receivables (34.1 per cent of revenue in FY23) has to be closely monitored.

About Netweb Technologies India

Incorporated in 1999, Netweb Technologies develops customised computing systems to address the high-end computational requirements of its customers. The company has a wide range of offerings including supercomputing systems, private cloud infrastructure, AI systems and enterprise workstations, storage solutions and data centre servers.

Strengths of Netweb Technologies

• One of the few players in India to offer a full stack of products and solutions suite in high-performance computing.
  
• Repeat customers contributed, on average, about 85 per cent to revenue over the last three years.

Weaknesses of Netweb Technologies

• Reliant on top 10 customers for more than 50 per cent of revenue (in FY23).
  
• Receivables accounted for an average of 34 per cent of the revenue in the last three financial years.

IPO questions

Company and business

• Are Netweb Technologies India's earnings before tax more than Rs 50 crore in the last 12 months?
  Yes. The company's profit before tax for FY23 was Rs 63 crore.
• Will Netweb Technologies be able to scale up its business?
  Yes. An increase in demand for high-performance computing systems due to faster speed, AI-enabled workstations and cloud infrastructure will help it to scale up.
• Does Netweb Technologies have recognisable brands with client stickiness?
  Yes. The average relationship with the top 10 customers in FY23 was around 5 years.
• Does the company have a credible moat?
  No. It operates in a competitive industry and competes with the likes of Hewlett-Packard, IBM, and Nvidia, among others.

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. Promoter's stake will be 75.4 per cent post-IPO.
• Do the top three managers have more than 15 years of combined leadership at Netweb Technologies?
  Yes. The combined leadership of the top three managers is more than 50 years.
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. No information to suggest otherwise. However, in 2022, SEBI had imposed a penalty on the promoters due to some irregularities with respect to derivatives trading.
• Is the company's accounting policy stable?
  Yes. No information to suggest otherwise.
• Is Netweb Technologies free of promoter pledging of its shares?
  Yes. No information to suggest otherwise.

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. The company's three-year average ROE and ROCE are 60.8 and 50.5 per cent, respectively. In FY23, the company's ROE and ROCE were 68 and 64.4 per cent, respectively.
• Was the company's operating cash flow positive during the last three years?
  No. The company reported negative operating cash flow in FY21.
• Is the company's net debt-to-equity ratio less than one?
  Yes. The company's net debt to equity ratio, as of March 2023, is 0.2 times.
• Is Netweb Technologies free from reliance on huge working capital for day-to-day affairs?
  No. The operations are working capital intensive and it relies on loans to fund it.
• Can the company run its business without relying on external funding in the next three years?
  Yes. Netweb has a profitable business and, moreover, the proceeds from the IPO will allow it to run its operations without external funding.
• Is Netweb Technologies free from meaningful contingent liabilities?
  No. Contingent liabilities as a percentage of equity is 30 per cent.

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 2.3 per cent operating earnings yield on its enterprise value.
• Is the stock's price-to-earnings less than its peers' median level?
  Yes. The company will trade at a price-to-earnings ratio of 59.7 times compared to peers' median level of 101.3 times.
• Is the stock's price-to-book value less than its peers' average level?
  Yes. The company will trade at a price-to-book ratio of 9.4 times compared to peers' average level of 12.1 times.

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

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