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IPO for a local tech firm is currently underway. TPL Trakker Limited (TPLT) is selling about 58 million of common stock at a fixed price of Rs12 per share (par value: Rs10), with a similar quantum of additional shares to be sold if demand exceeds base issue. The approximately Rs1.4 billion to be raised (inclusive of green-shoe option) is meant to pay off a Rs1.2 billion commercial paper that TPLT had issued back in January 2020 to expand its maps and container tracking business, upgrade IT infrastructure, meet working capital needs and service its debt. The paper was issued to bridge IPO proceeds.

With the assimilation of TPL Maps and TPL Rupiya alongside the core tracking business, TPLT is consolidating its strengths and transitioning from legacy tracking business of communication devices/sensors to an IOT-based (Internet of things/smart connected devices) business model. Currently, TPTL has three main revenue segments – the longtime business of connected cars (e.g. vehicle/location tracking and fleet management); digital mapping and location services (e.g. container tracking and navigation services); and industrial IOT solutions (e.g. e-ticketing and fuel/water management).

This firm’s fortunes are tied with automotive and trade sectors. As more and more new cars are sold in this low-density auto market, the better it is for TPLT’s tracking arm. Bank financing is also a driver for growth, as banks and insurance companies require vehicle tracking to keep assets safe. Expansion of digital economy – e.g. ride hailing and online delivery – is also a boon due to location-based data needs for the digital firms. Growth is also expected to come from trucking companies that realize the safety and efficiency benefits of smart fleet management. Tracking of goods on containers plying transit trade and local trade routes is also a growth avenue.

Latest financials show that connected cars segment provided about two-thirds of the firm’s topline. However, this dependency may reduce in favor of mapping and location business (about a third of business), as revenues from container tracking and licensed data may start growing. TPLT is to move into trans-shipment and to monitor more cargo activity, including on the Gwadar to Afghanistan route. Further integration with the digital economy, amid tie-ups with players like Bykea, Food Panda and Telenor, will also boost revenues in the mapping business. IOT partnerships with banks and telcos are taking hold.

If the government started paying attention to its digitization agenda, fruits will also fall in the lap of prominent local companies such as TPLT. It is already happening. For instance, Ogra had recently required oil tankers to monitor driver behavior by installing video vehicle telematics devices. Recently, it was reported that TPL Maps had been chosen by the federal government’s coronavirus body NCOC as a “primary location-based services provider” to power different government applications to fight Covid-19. The firm is also awaiting FBR approval to commence trans-shipment cargo’s tracking in Pakistan.

However, there are considerable risks as well. The “mobility” sector in general is severely affected by the downturn in economic activities that have prolonged due to Covid-19, whereas the firm needs high-growth market opportunities soon to level up its business and generate sufficient cash flows to bring down its debt. The current business model is also skewed towards significant upfront costs, as TPLT has to buy the equipment itself and beforehand but customers are charged on a rental model for the devices. The company is also exposed to exchange rate risk as most of its equipment is imported.

On financial health, revenues have stayed flat at just below Rs2 billion in recent years, with a slim, single-digit profit margin. In 1HFY20, TPLT scored a net loss of Rs187 million and negative operating cash flows. In 2HFY20, the coronavirus situation is expected to have further affected the bottomline. The 30.7x price to earning (PE) multiple in the IPO prospectus looks on the high side, but it is meaningless to analyze PE for a loss-making firm. For a tech firm that is aiming high growth in the future, a revenue multiple (e.g. price to sales – P/S) makes more sense. Over here, the PS ratio of around 1 looks fine. Let’s see how the market, which has seen volumes return lately, responds to this offer.