“AVOID” to

Xelpmoc Design and Tech Ltd.

To benefit from the increased investment in rail sector

Salient features of the IPO: • Xelpmoc Design and Tech Ltd. (Xelp) is planning to raise Rs. 230mn

through an IPO by offering 3.48-3.71mn share between the price range Rs. 62 - 66 per share.

• The IPO consists of only fresh issue. Net proceeds from the same would be largely utilized for the purchase of IT hardware and network equipment’s for new development centers, purchase of fit outs for new development centers and funding working capital requirements. Residual funds would be utilized towards general corporate purposes.

Key competitive strengths: • End-to-end solutions and support • Accessibility to domain experts • Organization structure that enhances client service • Experienced management and entrepreneurial culture Risk and concerns: • Slowdown in economic expansion • Unfavorable government regulation – like data privacy etc. • Revenue concentration risk • Slower growth in the business of the startups in which the company

has invested • Competition Valuation & recommendation: There are no comparable listed companies in India and abroad that engage in the same line of business as Xelp. Currently, the company is loss making. At the higher price band of Rs. 66 per share, Xelp’s share is valued at a P/B multiple of 2.1x (to its restated FY18 BVPS of Rs. 30.8). Moreover, it is value at a P/S multiple of 18.2x. Below are few key observations of the issue: (For detailed valuation, refer to page 7 of the report) • Incorporated in 2015, Xelp is a provider of professional & technical

consulting services, offering technology services and end-to-end technology solutions & support. Its clients range from entrepreneurs and start-up enterprises to established companies, engaged in e-commerce, transportation and logistics, recruitment, financial services, social networking, and various other industries. The company provides a wide range of services, including, mobile and web application development, prototype development, thematic product development and data science & analytics assistance.

• The company generates 50% of the revenue from established clients, while the rest is generated from startups in which it has invested. One of the key established corporate client is Tata CliQ.

• Generally, the company makes investments in early stage companies (startups) engaged in strategic growth sectors. As of 30th Sept. 2018, the company has acquired a minority stake of around 8-10% in various startups. Xelp provided its services and solutions to these startups and realize it as the business. The engagement of the company with the startups is evolving in nature i.e. the business offering changes with the needs of the clients. In other words, the business of Xelp doesn't stop from the launch of the product of the startups. The company keeps on providing technical support through its services and solutions.

22nd Jan. 2019

1

Recommendation AVOID

Price Band (Rs.) Rs. 62 - 66 per Share

Face Value (Rs.) Rs. 10

Shares for Fresh Issue (mn)

3.48 - 3.71mn Shares

Shares for OFS (mn) Nil

Fresh Issue Size (Rs. mn) Rs. 230mn

OFS Issue Size (Rs. mn) N/A

Total Issue Size (Rs. mn) Rs. 230mn

Bidding Date 23rd Jan. - 25th Jan. 2019

MCAP at Higher Price Band

Rs. 903mn

Enterprise Value at Higher Price Band

Rs. 652mn

Book Running Lead Manager

ITI Capital Ltd.

Registrar Karvy Fintech Pvt. Ltd.

Sector/Industry IT & ITES

Promoters Mr. Sandipan Chattopadhyay, Mr. Srinivas Koora and Mr. Jaison Jose

Pre and post - issue shareholding pattern

Pre – Issue Post - Issue

Promoter and Promoter Group

78.13% 58.24%

Public 21.87% 41.76%

Total 100.00% 100.00%

Retail Application Money at Higher Cut-Off Price per Lot

Number of Shares per Lot 200

Application Money Rs. 13,200 per Lot

Retail Discount Rs. 3 on the Offer Price

Analyst

Rajnath Yadav

Research Analyst (022 - 6707 9999; Ext: 912)

Email: rajnath.yadav@choiceindia.com

• The agreements with the investee companies, provide for the option of investments in exchange for services provided to such entities, as opposed to realizing the sum for such services provided. In the past, Xelp has not exercised this option. As of 30th Sept. 2018, the book value of investment in startups is around Rs. 21.5mn, while the fair value was around Rs. 195.3mn. Thus the business growth of the Xelp is dependent on the ability of such startups to grow their business.

• Xelp is in early stage of its business cycle. As a result, it derives a significant portion of revenues from a limited number of clients. As on FY18 and H1 FY19, top five contributed 85% and 82% of the total revenue, respectively. Similarly, during the same period, its top ten clients generated 98% and 97% of the revenue, respectively. Since there is no exclusive service contract with the clients; and with intense competition, loss of any single client would materially impact the performance of the company. However, we believe that, the company with its domain expertise and technological services & solutions would add more clients in future and reduce the revenue concentration risk associated with the business.

• The company has a short financial history. On consolidated basis, it has reported loss at EBITDA and PAT level for both the fiscal i.e. FY17 and FY18. Thus it is very difficult to assess the performance of the company. Nevertheless, it has reported a 157.7% growth in revenue in FY18. In H1 FY19, Xelp reported a top-line of Rs. 35.9%. Extrapolating the same, the annual revenue for FY19 comes around to Rs. 72mn, which is a growth of 44% over FY18. With presence in high-growth sector and with similar growth in the top-line, the company may report profitability in mid-term.

The public issue being below Rs. 2,500mn, the share will trade in trade for trade (TFT) segment for the initial 10 days post listing. Thus considering the above factors, current turbulence in the domestic equity market and listing in “T” category, we assign a “AVOID” rating to the issue.

Offer Opens on 23-Jan-2019

Offer Closes on 25-Jan-2019

Finalization of Basis of Allotment 30-Jan-2019

Unblocking of ASBA Account 31-Jan-2019

Credit to Demat Accounts 01-Feb-2019

About the issue: • Xelp is coming up with an initial public offering (IPO) with 3.48 - 3.71mn shares (fresh issue: 3.48 - 3.71mn shares; OFS

shares: nil) in offering. The offer represents around 25.46% of its post issue paid-up equity shares of the company. Total IPO size is Rs. 230mn.

• The issue will open on 23rd Jan. 2019 and close on 25th Jan. 2019.

• The issue is book building with a price band of Rs. 62 - 66 per share.

• There is a discount of Rs. 3 per share on the offer price for the retail investors.

• The IPO consists of only fresh issue. Net proceeds from the same would be largely utilized for the purchase of IT hardware and network equipment’s for new development centers, purchase of fit outs for new development centers and funding working capital requirements. Residual funds would be utilized towards general corporate purposes.

• 75% of the net issue shall be allocated on a proportionate basis to qualified institutional buyers, while rest 15% and 10% is reserved for non-institutional bidders and retail investors, respectively.

• Promoter hold 78.13% stake in the company and post IPO this will come down to 58.24%. Public holding will increase

from current 21.87% to 41.76%.

Pre and Post Issue Shareholding Pattern (%)

Pre Issue Post Issue (at higher price band)

Promoter & Promoter Group (%) 78.13% 58.24%

Public (%) 21.87% 41.76%

Source: Company RHP

Indicative IPO Process Time Line:

Commencement of Trading of Equity Shares 04-Feb-2019

Company Introduction: Xelp is a provider of professional and technical consulting services, offering technology services and end-to-end technology solutions and support. Its clients range from entrepreneurs and start-up enterprises to established companies, engaged in e-commerce, transportation and logistics, recruitment, financial services, social networking, and various other industries. The company provides a wide range of services, including, mobile and web application development, prototype development, thematic product development and data science and analytics assistance. Xelp grows its portfolio of services and products as the needs of its clients evolve. The company commenced operations in Bengaluru in 2015 and has since serviced enterprises across four states in India. Xelp business operations may broadly be categorized as technology services, and technology solutions/ products. It also occasionally provide business support to some of its clients to enable them to set-up their operations. Technology Services: Xelp provides technology services to companies that typically operate at a start-up level and intend to scale their operations. The company also provides similar services to certain government organizations in India. These services primarily comprise of deploying artificial intelligence, machine learning and other emerging tools. It provides technology services by way of progressive app development, prototype development, thematic product development for international markets, modern frontend architecture, query optimization and rapid iteration. Xelp also possess data science capabilities and offers designing, architecture & development of modern lake infrastructure. Technology Solutions/ Products: The company develops range of products that address various challenges that its clients experience across industries. Recent products it is developing include a location decision system and a sentiment analysis tool. Xelp’s solutions for these assignments have typically been in the form of artificial intelligence driven tools. The company also occasionally provides business and financial support to some of the clients to enable them to set-up their operations. These arrangements are typically in the form of master service agreements, under which Xelp provide support services in exchange for fees or an equity stake in the entity. Competition: Xelp competes with a variety of information technology companies, as well as service providers. However, none of these companies are involved exclusively in a business similar to business of the company and comparable to the scale of operations. According to Xelp, its competitors are Happiest Minds Technologies Pvt. Ltd., Heptagon Technologies Pvt. Ltd., Techjini, Goodworklabs, Snse pro, Openxcell Technolabs Pvt. Ltd. for service segments & fractal analytics, and Hansa Customer Equity Pvt. Ltd. for data sciences. Xelp also faces competition from global and Indian enterprise solution companies. Key competitive factors in this industry include changing technologies, client preferences & needs and the ability to deliver solutions to meet such evolving needs. Other competitive factors include breadth & depth of service offerings, reputation & track record, ability to tailor enterprise solution service offerings to client needs and industry expertise.

Company Introduction (Contd…): Financial performance: Since it was incorporated in 2015, Xelp has a short operating history i.e. FY17 and FY18. On the back of good traction from the Retail & Consumer vertical, the company reported a 78.6% rise in the total operating revenue to Rs. 49.7mn in FY18. Retail & Consumer vertical reported a business of Rs. 30.1mn as compared to Rs. 0.7mn in FY17. Business from Communication, Media & Technology vertical declined by 61.1% to Rs. 3.9mn in FY18. Operating expenditure, which included employee benefit expenses and other expenses increased by 15.3% and 215.8%, respectively in FY18. As a result total operating expenditure increased by 80% CAGR. Consolidated EBITDA was at a loss of Rs. 34.4mn in FY18 as compared to a loss of Rs. 27.5mn in FY17. Depreciation & amortization charges declined by 19.8% CAGR, other income increased by 53.9%. Reported PAT was at a loss of Rs. 34.3mn as compared to a loss of Rs. 28.2mn in FY17. Cash flow from operations was negative over FY17-18.

Source: Company RHP

FY17 FY18 H1 FY19 Y-o-Y (%) Revenue from Operations 19.3 49.7 35.9 157.7% EBITDA (27.5) (34.4) (22.5) 25.3% Reported PAT (28.2) (34.3) (22.7) 21.4%

Restated Adjusted EPS (2.1) (2.5) (1.7) 21.4%

Revenue Growth Rate (%) 157.7% EBITDA Growth Rate (%) 25.3% EBITDA Margin (%) -142.2% -69.1% -62.7% EBIT Growth Rate (%) 23.8% EBIT Margin (%) -147.0% -70.6% -66.0% Reported PAT Growth Rate (%) 21.4% Reported PAT Margin (%) -146.2% -68.9% -63.2%

Inventories Turnover Ratio (x) Trade Receivable Turnover Ratio (x) 4.8 Accounts Payable Turnover Ratio (x) 66.1 Fixed Asset Turnover Ratio (x) 21.9 16.1 12.0 Total Asset Turnover Ratio (x) 0.1 0.2 0.1

Current Ratio (x) 0.2 0.8 0.5

Net Debt (Rs.) (2.1) (21.7) (6.5)

Net Debt to EBITDA (x) 0.1 0.6 0.3

RoE (%) -21.3% -17.8% -12.9% RoA (%) -15.0% -13.8% -9.4% RoCE (%) -15.9% -14.7% -10.7%

© CHOICE INSTITUTIONAL RESEARCH

Competitive Strengths: • End-to-end solutions and support • Accessibility to domain experts • Organization structure that enhances client service • Experienced management and entrepreneurial culture

Business Strategy:

• Growing business by enhancing technological capabilities and expanding domain expertise

• Expand operations in other geographies • Cross-sell and up-sell to the existing client base • Continue to focus on public sector clients while building private sector client

base • Strengthen and support human capital • Evaluate strategic acquisition and alliance opportunities

Risk and Concerns:

• Slowdown in economic expansion • Unfavorable government regulation – like data privacy etc. • Revenue concentration risk • Poor acceptance of services and solutions among the corporate

clients • Slower growth in the business of the startups in which the

company has invested • Higher personnel and consultancy cost • Competition

© CHOICE INSTITUTIONAL RESEARCH

Peer Comparison and Valuation: There are no comparable listed companies in India and abroad that engage in the same line of business as Xelp. Currently, the company is loss making. At the higher price band of Rs. 66 per share, Xelp’s share is valued at a P/B multiple of 2.1x (to its restated FY18 BVPS of Rs. 30.8). Moreover, it is value at a P/S multiple of 18.2x. Below are few key observations of the issue: • Incorporated in 2015, Xelp is a provider of professional & technical consulting services, offering technology services and

end-to-end technology solutions & support. Its clients range from entrepreneurs and start-up enterprises to established companies, engaged in e-commerce, transportation and logistics, recruitment, financial services, social networking, and various other industries. The company provides a wide range of services, including, mobile and web application development, prototype development, thematic product development and data science & analytics assistance.

• The company generates 50% of the revenue from established clients, while the rest is generated from startups in which it has invested. One of the key established corporate client is Tata CliQ.

• Generally, the company makes investments in early stage companies (startups) engaged in strategic growth sectors. As of 30th Sept. 2018, the company has acquired a minority stake of around 8-10% in various startups. Xelp provided its services and solutions to these startups and realize it as the business. The engagement of the company with the startups is evolving in nature i.e. the business offering changes with the needs of the clients. In other words, the business of Xelp doesn't stop from the launch of the product of the startups. The company keeps on providing technical support through its services and solutions.

• The agreements with the investee companies, provide for the option of investments in exchange for services provided to such entities, as opposed to realizing the sum for such services provided. In the past, Xelp has not exercised this option. As of 30th Sept. 2018, the book value of investment in startups is around Rs. 21.5mn, while the fair value was around Rs. 195.3mn. Thus the business growth of the Xelp is dependent on the ability of such startups to grow their business.

• Xelp is in early stage of its business cycle. As a result, it derives a significant portion of revenues from a limited number of clients. As on FY18 and H1 FY19, top five contributed 85% and 82% of the total revenue, respectively. Similarly, during the same period, its top ten clients generated 98% and 97% of the revenue, respectively. Since there is no exclusive service contract with the clients; and with intense competition, loss of any single client would materially impact the performance of the company. However, we believe that, the company with its domain expertise and technological services & solutions would add more clients in future and reduce the revenue concentration risk associated with the business.

• The company has a short financial history. On consolidated basis, it has reported loss at EBITDA and PAT level for both the fiscal i.e. FY17 and FY18. Thus it is very difficult to assess the performance of the company. Nevertheless, it has reported a 157.7% growth in revenue in FY18. In H1 FY19, Xelp reported a top-line of Rs. 35.9%. Extrapolating the same, the annual revenue for FY19 comes around to Rs. 72mn, which is a growth of 44% over FY18. With presence in high-growth sector and with similar growth in the top-line, the company may report profitability in mid-term.

The public issue being below Rs. 2,500mn, the share will trade in trade for trade (TFT) segment for the initial 10 days post listing. Thus considering the above factors, current turbulence in the domestic equity market and listing in “T” category, we assign a “AVOID” rating to the issue.

© CHOICE INSTITUTIONAL RESEARCH

Financial Statements:

Source: Company RHP

Consolidated Profit and Loss Statement (Rs. mn)

FY17 FY18 H1 FY19 Annual Growth over

FY17 (%)

Revenue from Operations 19.3 49.7 35.9 157.7% Employee Benefits Expense (31.7) (36.5) (30.2) 15.3% Other Expenses (15.1) (47.6) (28.2) 215.8% EBITDA (27.5) (34.4) (22.5) 25.3% Depreciation and Amortization Expense (0.9) (0.7) (1.2) -19.8% EBIT (28.4) (35.1) (23.7) 23.8% Finance Costs (0.1) (0.0) (0.0) -35.7% Other Income 0.4 0.6 0.4 53.9% Share of Net Profit of Associates and Joint Ventures (0.0) 0.3 (0.0) -1424.0% PBT (28.0) (34.2) (23.3) 22.0% Tax Expenses (0.2) (0.0) 0.7 -73.5% Reported PAT (28.2) (34.3) (22.7) 21.4%

Consolidated Balance Sheet Statement (Rs. mn)

FY17 FY18 H1 FY19 Annual Growth over FY17

(%)

Equity Share Capital 48.7 65.2 102.0 33.7% Other Equity 83.7 126.9 73.6 51.6% Long Term Provisions 0.3 1.6 1.4 406.1% Deferred Tax Liabilities (Net) 45.4 45.2 44.7 -0.5% Trade Payables 0.8 0.8 4.2 0.0% Other Current Financial Liabilities 8.4 5.3 13.1 -37.5% Other Current Liabilities 0.3 2.6 2.1 770.8% Short Term Provisions 0.0 0.1 0.1 Total Liabilities 187.7 247.5 241.3 31.9%

Property, Plant and Equipment 0.9 3.1 3.0 250.1% Investments in Joint Ventures & Associates 1.5 1.2 Other Non Current Investments 174.1 190.0 194.2 9.1% Non Current Loans 4.0 4.7 5.3 17.3%

Other Non Current Financial Assets 1.1 0.6

Non Current Tax Assets (Net) 0.3 5.5 6.4 1489.6% Trade Receivables 4.7 15.9 4.1 239.5% Cash and Cash Equivalents 2.1 21.7 6.5 948.5% Other Current Financial Assets 0.8 3.8 10.8 373.7% Other Current Assets 0.8 0.3 9.2 -66.3% Total Assets 187.7 247.5 241.3 31.9%

Source: Company RHP

© CHOICE INSTITUTIONAL RESEARCH

Financial Statements:

Note: Ratios calculated on pre-issue data; Source: Company RHP

Consolidated Cash Flow Statement (Rs. mn)

Particulars (Rs. mn) FY17 FY18 H1 FY19 Annual Growth over FY17

(%) Cash Flow Before Working Capital Changes (27.6) (31.1) (21.2) 12.5% Change in Working Capital (2.6) (12.6) 3.8 378.6% Cash Flow from Operating Activities (30.6) (48.9) (18.3) 59.8% Purchase of Property , Plant & Equipment (0.7) (2.9) (1.1) 319.2% Cash Flow from Investing Activities (2.7) (22.4) (5.4) 737.9% Cash Flow from Financing Activities 33.6 90.9 8.4 170.5%

Net Cash Flow 0.4 19.6 (15.2) 5388.0% Opening Balance of Cash and Bank Balances 1.7 2.1 21.7 20.9% Closing Balance of Cash and Bank Balances 2.1 21.7 6.5 948.5%

Consolidated Financial Ratios

Particulars (Rs. mn) FY17 FY18

Revenue Growth Rate (%) 157.7%

EBITDA Growth Rate (%) 25.3%

EBITDA Margin (%) -142.2% -69.1%

EBIT Growth Rate (%) 23.8%

EBIT Margin (%) -147.0% -70.6%

Reported PAT Growth Rate (%) 21.4%

Reported PAT Margin (%) -146.2% -68.9%

Liquidity Ratios

Current Ratio 0.2 0.8

Debt Equity Ratio

Net Debt to EBITDA 0.1 0.6

Turnover Ratios

Inventories Days

Debtor Days 88.7 116.8

Payable Days (14.2) (5.5)

Cash Conversion Cycle 74.4 111.3

Fixed Asset Turnover Ratio (x) 21.9 16.1

Total Asset Turnover Ratio (x) 0.1 0.2

Return Ratios

RoE (%) -21.3% -17.8%

RoA (%) -15.0% -13.8%

RoCE (%) -15.9% -14.7%

Per Share Data

Restated Reported EPS (Rs.) (2.1) (2.5)

Restated DPS (Rs.) 0.0 0.0

Restated BVPS (Rs.) 9.7 14.0

Restated Operating Cash Flow Per Share (Rs.) (2.2) (3.6)

Restated Free Cash Flow Per Share (Rs.) 0.0 (5.2)

Dividend Payout Ratio 0.0% 0.0%

© CHOICE INSTITUTIONAL RESEARCH

Equity Research Team

Name Designation Email id Contact No.

Ajay Kejriwal President ajay@choiceindia.com 022 - 6707 9850

Sundar Bhagwandas Head of Research - Fundamental sanmukhanis@choiceindia.com 022 - 6707 9910

Sumeet Bagadia Head of Research - Technical sumeet.bagadia@choiceindia.com 022 - 6707 9830

Amit Singh VP - Institutional Sales amit.singh@choiceindia.com 022 - 6707 9530

Rajnath Yadav Research Analyst rajnath.yadav@choiceindia.com 022 - 6707 9912

Satish Kumar Research Analyst satish.kumar@choiceindia.com 022 - 6707 9913

Aman Lamba Research Associate aman.lamba@choiceindia.com 022 - 6707 9917

Shrey Gandhi Research Associate shrey.gandhi@choiceindia.com 022 - 6707 9914

Kkunal Parar Sr. Research Associate kkunal.parar@choiceindia.com 022 - 6707 9982

Sachin Gupta Research Associate sachin.gupta@choiceindia.com 022 - 6707 9978

Surendra Bhaskar Research Associate surendra.bhaskar@choiceindia.com 022 - 6707 9978

Palak Kothari Research Associate palak.kothari@choiceindia.com 022 - 6707 9946

Sunand Subramaniam Sr. Research Analyst sunand.subramaniam@choiceindia.com 022 - 6707 9929

Sunil Rokade Research Analyst sunil.rokade@choiceindia.com 022 - 6707 9972

Harsha Sharma Research Analyst harsha.sharma@choiceindia.com 022 - 6707 9979

Karan Bhatt Research Advisor karan.bhatt@choiceindia.com 022 - 6707 9906

Diksha Mhatre Research Advisor diksha.mhatre@choiceindia.com 022 - 6707 9933

Neeraj Dubey Research Advisor neeraj.dubey@choiceindia.com 022 - 6707 9971

Disclaimer This is solely for information of clients of Choice Broking and does not construe to be an investment advice. It is also not intended as an offer or solicitation for the purchase and sale of any financial instruments. Any action taken by you on the basis of the information contained herein is your responsibility alone and Choice Broking its subsidiaries or its employees or associates will not be liable in any manner for the consequences of such action taken by you. We have exercised due diligence in checking the correctness and authenticity of the information contained in this recommendation, but Choice Broking or any of its subsidiaries or associates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this recommendation or any action taken on basis of this information. This report is based on the fundamental analysis with a view to forecast future price. The Research analysts for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. Choice Broking has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Choice Broking makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. The opinions contained within the report are based upon publicly available information at the time of publication and are subject to change without notice. The information and any disclosures provided herein are in summary form and have been prepared for informational purposes. The recommendations and suggested price levels are intended purely for stock market investment purposes. The recommendations are valid for the day of the report and will remain valid till the target period. The information and any disclosures provided herein may be considered confidential. Any use, distribution, modification, copying, forwarding or disclosure by any person is strictly prohibited. The information and any disclosures provided herein do not constitute a solicitation or offer to purchase or sell any security or other financial product or instrument. The current performance may be unaudited. Past performance does not guarantee future returns. There can be no assurance that investments will achieve any targeted rates of return, and there is no guarantee against the loss of your entire investment.

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