Bridging the tech gap

IPO SCAN

Cambridge Technology Enterprises has positioned itself well but can it deliver?

The US IT services pie is large and so are the number of players eyeing a share of it. For small IT firms this poses a problem on two counts. While large companies tend to award contracts to the consulting giants and bigger IT players that have size, pricing power and a diversified skill base, projects at the bottom of the pyramid tend to be low on margins.

To overcome these hurdles, Cambridge Technology Enterprises (CTE), a small company in the IT services space, is positioning itself as a niche player which offers service oriented architecture (SOA)-based solutions targeted at mid-sized companies.

SOA, which is an application integration solution, enables organisations to integrate disparate systems and applications running across the organisation.

Unlike larger software players and product companies which have readymade solutions and outsourced projects, service providers like CTE depend on what the company calls "demand creation".

Explaining the business model, Bhaskar Panigrahi, CEO and chairman of CTE, says that IT executives of companies are given a presentation which is followed by a prototype depicting the cost benefits and savings that the organisation will make from the solution.

The conversion ratio of this workshop model is 36 per cent. The company uses business process and domain knowledge to advise companies on tapping newer markets and integrate new technologies with older systems to reduce duplication of functionalities and establish scalable frameworks.

These solutions are then implemented by the company's global delivery centre in Hyderabad and its three US-based centres including one within the MIT campus in Cambridge, Massachusetts.

In order to beef up its presence in the US and expand its development centre in Hyderabad, the company is tapping the Indian market to raise Rs 24 crore at a fixed price of Rs 38 per share. While expansion of facilities and setting of competency centres are key objectives, 60 per cent of the money will be used to fund acquisitions.

The acquisitions, the company hopes, will help it to quickly scale up its domain expertise across industries and expand its business operations quickly.

Having earned a significant portion of its revenues from integrating applications based on Oracle's products, the company wants to set up competency centres for key SOA technologies which include Oracle Fusion, SAP Netweaver and IBM Websphere.

It is also planning to set up a components library that would develop frameworks, tools and components that would be reusable across customer implementations bringing down its development costs.

While the company recorded sales of Rs 18 crore for the 15-month period ended March 2006, its revenues for the year ended December 2004 was Rs 14 crore. It had revenues of Rs 5 crore for the first three months of the current fiscal. 
 

FINANCIALS
	CY 2004	FY March (15 mths)2006	June (3 mths)2006
Net sales	10.50	18.40	4.10
Operating profit	1.79	4.11	1.53
OPM (%)	17.05	22.34	37.32
Net profit	1.38	3.84	1.35
NPM (%)	13.14	20.87	32.93
EPS	3.21	9.24

On an expanded equity capital and estimated EPS of Rs 3.4 for FY07, the stock will trade at an earnings multiple of 11. Though the company's operations and focus are different from listed software entities, its forward P/E can be justified only if it can ramp up quickly (post acquisitions) and reach a critical size (Rs 100 crore) by FY08.

Issue Opens: December 29, 2006
Issue Closes: January 9, 2007