Good on paper

IPO REVIEW

While the issue pricing is reasonable, lack of clarity about the business model is a concern on Prithvi Information Solutions.

Apparently, Prithvi Information Solutions was named thus, because the promoters wanted to make it a global company. The Hyderabad-based company, a customized IT solutions and software services provider had decided to enter the capital market with a public issue of 5 million shares at a price band of Rs 250-Rs 270.

The issue would constitute 27.66 per cent of the fully diluted post issue paid-up capital of the company. It has to be noted that at first look the company's numbers look impressive and the valuations are attractive.

However, the company doesn't seem to have any competitive advantage that sets it apart from many other mid-tier IT companies. Also, the company runs a predominantly onsite business, where margins are known to be tighter.

The business
Prithvi Information Solutions was promoted in 1998 by the brother and sister team of V. Madhavi and V Satish Kumar. The former is the chairperson of the company and holds an M.S in Computational Mechanics from Carnegie Mellon University, USA.

The company provides software solutions across a host of technologies and platforms and has software solutions design and development centres apart from five marketing offices in US. The offshore delivery centres are situated in Hyderabad and Bangalore.

The company plans to set up another offshore delivery centre in Hyderabad with a 1500-seater capacity and the proceeds of the issue will be mostly used towards this end apart from meeting working capital requirements.

On the growth path
The company has seen a phenomenal growth in the seven-odd years that it has been in existence.

To start with, the company was founded to service a single offshore development contract from Merrill Lynch worth US$10,000. By 1999, it had achieved a revenue of Rs one crore and by 2001, the company had revenues of Rs 100 crore. Froma four-member team in 1998, Prithvi today has an employee strength of 900.

According to the company, its functional expertise and business solutions cover a broad spectrum of industries including banking and finance, health care, manufacturing, distribution and logistics and the services sector.

Prithvi's service lines are divided into three strategic business units (SBUs), viz, technology development outsourcing (which includes application development, product development, enterprise solutions), intelligence solutions services (includes business intelligence, analytics and data processing) and process outsourcing.

Application development revenues contribute the maximum to overall revenues at 37 per cent.

Prithvi currently has 85 clients in US and India, including five Fortune 500 companies. Some of the well-known clients include John Hopkins University Hospital, Merrill Lynch, State of Ohio, T-Mobile and Meijers McKesson.

Since the majority of the company's revenues are derived from overseas markets (over 90 per cent of the company's revenues in FY05 were derived from US clients), it has put in place a core team of 20 sales personnel in USA and the Asia Pacific region.

"About 65 per cent of the company's business comes from repeat business or referrels from existing clients," says Prithvi's chairperson, Madhavi.

On a positive note, the company's revenue flow is not dependent amongst few clients, which reduces client risk. Total sales from top 10 customers constituted only 22 per cent, 24 per cent and 28 per cent in FY03, FY04 and FY05 respectively.

Financials
These being its early years, Prithvi has managed to record impressive growth in its financials in the past few years, albeit from a lower base. The company posted a 23.86 per cent growth in revenues in FY05 (Rs 305 crore) over FY04, while net profit (Rs 28.84 crore) rose 58.55 per cent. The CAGR revenue growth over FY01 to FY05 amounts to 84 per cent.
 

FINANCIALS
In Rs crore	FY05	FY04	% change	Q2FY06
Net sales	305.00	246.24	23.86	98.22
Other income	0.33	-5.58		-0.22
Operating profit	18.87	23.74	-20.51	10.82
OPM (%)	6.19	9.64		11.02
Net profit	28.84	18.19	58.55	10.22
Net margin	9.46	7.39		10.41
EPS (Rs)	47.21	29.94		8.95
P/E@Rs 250		5.30
P/E@Rs 270		5.72

Most of Prithvi's top management group works out of the US and most of its revenues are also derived from the US. Some analysts have expressed definite concerns about the company's business model and the ability to scale up in future because of a lack of clarity on the business.

Valuations
Purely based on the numbers, the issue looks attractive. "Prithvi can be compared with mid-sized companies and the issue is reasonably priced," observed one analyst.

The company has listed i-Gate Global Solutions, Mastek and Hexaware Technologies as its competitors from the tier-II segment, apart from TCS from the Tier 1. While a comparison with TCS may not be necessary at this stage, compared to the others, the valuations at 5x are reasonable. In comparison, i-Gate is trading at a P/E of 40x, Mastek at 13x and Hexaware at 17x.

While there is no doubting the growth potential of export market for Indian IT- enabled services (ITES) industry (a projected CAGR of 30 per cent till 2009), it is an altogether different matter, whether investors would want to invest in a company which basically runs a US-based operation and as such is just one more of the ever growing number of solution providers in the ITES space.

Issue opens: 25 October, 2005
Issue closes: 28 October, 2005