Fatpipe Networks’ products and services help organisations to effectively communicate between their headquarters and branch offices. Fatpipe’s router clustering (both patented and patent-pending methods) technology enables high-speed data transfer through multiple lines and increases the bandwidth (by about 4 to 18 times) at the same time ensuring business continuity and disaster recovery. The company operates from its registered office in India and branch offices at Utah and Arizona in the United States.
The company’s customers, over 1,400 across five continents, include 20 of the world’s top law firms, luxury hotels, Fortune 1000 companies, banks, educational institutions and government entities.
Fatpipe has come out with a public offer of about 60 lakh shares worth Rs 49 crore. Of the IPO proceeds, about half is planned towards acquiring businesses and expansion of its marketing base.
| ISSUE DETAILS | |
| Size (Rs cr) | 45 |
| Price band (Rs) | 82-85 |
| GROWING FAST | ||
| In Rs crore | FY09 | 9M FY10 |
| Total income | 42.30 | 45.90 |
| Ebitda | 6.42 | 9.86 |
| Net profit | 3.99 | 5.20 |
| EPS (Rs) * | 3.10 | 5.32 |
| P/E (x) @ Rs 82 | 26.50 | 15.40 |
| P/E (x) @ Rs 85 | 27.40 | 16.00 |
| *Pre-issue equity and annualised Source: RHP | ||
The business
Fatpipe communication devices bond multiple-data lines from multiple-data carriers into one “Fatpipe” without internet service provider cooperation or programming.
It works from anywhere in the world with any local WAN (wide area network) technology and each of these devices cost between $6,500 and $30,000 with the average price of the box estimated at $10,000.
With seven patents to its credit now, Fatpipe intends to further beef up its R&D efforts from around 40 staff by another 25. With these additions, the company intends to accelerate innovation in areas like WAN optimisation and acceleration, security and services and disaster prevention. The company has earmarked about 14 per cent of the IPO proceeds towards strengthening its R&D activities.
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Besides ramping up research capabilities, Fatpipe will be setting up a wholly-owned subsidiary in the US to expand its operations in the country and to solicit government business.
More importantly, it is proposing to expand its operations in China, Singapore, South Africa, Kenya, Argentina, Germany, France, Eastern Europe and Australia by setting up marketing offices.
Overall, around 16 new offices are expected to be set up, with the company earmarking around Rs 10 crore from IPO proceeds. In addition to opening offices globally, Fatpipe would look to enhance capabilities and address geographical coverage through strategic acquisitions.
The focus is to grow outside the US. Fatpipe plans to boost the present non-US sales of 10 per cent of revenues to 40 per cent over the next three years.
Investment rationale
The United States is an important market; with India, Mexico, Brazil, Africa and China being the fast-growing regions. Overall, the company has been able to sell around 6,000 devices with demand coming from segments like banking and hospitals. India could be one of the markets that the company might focus going ahead. With huge opportunity in sectors like banking (over 44,000 core banking branches) and retail (hundreds are coming up and need online inventory management systems) among others, it could open better avenues for the company. However, there are some concerns. For instance, its return on shareholder’s funds (RoNW) was 14.5 per cent as on December 31, 2009, while its receivables as a percentage of sales have ranged 27-30 per cent in 2008-09 and nine months to December 2009, both of which are not impressive.
While Fatpipe’s scale of operations is small, the competitive nature of the industry and the threat of substitute products add to the risks.
While there are no strictly comparable listed peers, at the lower-price band of Rs 82, the IPO is priced at over 15 times annualised earnings for nine months ended December 2009. However, considering that the company seems to be growing at a fast pace and assuming a robust growth in earnings in the current fiscal as well, the valuations at over 16 times estimated 2010-11 earnings are not cheap.
Hence, only those investors with a good appetite for risk and patience may consider this issue.