Lot to prove

IPO REVIEW

Despite geographic and client concentration risks, and low entry barriers, Vishal Information Technologies' IPO is priced at a premium.

Although the information overload that we face continues to rise as the days go by, the consolation comes from the fact that newer ways have been devised to use information more meaningfully.

As the penetration of computer increases, digitalization is gaining momentum and is turning out to be a rather profitable business proposition.

Vishal Information Technologies (Vishal IT), a company in the field of ITES/BPO services and a 51.5 per cent subsidiary of Tutis Information Technologies, jumped on to the bandwagon in the year 2000, to provide data digitalization and e-publishing solutions to global enterprises.

Vishal IT focuses on providing solutions for the print production industry with services like data digitalization, e-publishing, digital library and Print-on-Demand (PoD). Data digitalization primarily involves converting handwritten or printed text into a digital format.

The company specializes in the production of large print files specially aimed for the visually impaired. Majority of the company's business is predominantly sourced from the UK and USA through tenders floated by the various government authorities, educational institutes, publishing houses, etc.

The IPO
The current offer is aimed at raising Rs 39.06-41.85 crore by issuing 27.9 lakh shares priced between Rs 140-150 each. However, only a part of this (17.9 lakh shares) is through issue of new shares by the company. Hence, only Rs 25.06-26.85 crore, as the case may be, would be raised by the company for investment towards its growth plans. The remaining part of the IPO (Rs 14-15 crore) comprises of an offer for sale of 10 lakh shares by existing shareholders.

Presently, the company operates from leased facilities in Chennai and Mumbai with approximately 475 workstations.

The company proposes to utilise the net proceeds of the issue to partly finance the proposed expansion of the facilities in Chennai. It plans to do so by buying office space at a SEZ based in Chennai (costing Rs 16.05 crore), which will increase its workstation capacity to 800.

Besides, it plans to set up a quality assurance center and a marketing office in Mumbai (costing Rs 5.44 crore), as well as a subsidiary each in the UK and USA (at a cost of Rs 6 crore) for active participation in the bidding process. These plans however, are expected to be completed between January-March 2009.

Prospects
Global shift towards process outsourcing backed by low cost local talent pool has seen the Indian ITES-BPO industry grow at an impressive CAGR of 39 per cent in the last three years.

On the other hand, publishers are taking their content online to reach out to a wider readership audience across geographies; this translates into an opportunity of $430 billion for the global digital publishing industry.

These are encouraging signs for Vishal IT whose revenues and earnings, both, have grown at a CAGR of 31 per cent over the last four years.

As a publisher, the company has developed digital copies of about 15,000 titles in the last two years. The company has entered into a tie-up with a large PoD company to convert their publishers' titles into large print format.

This PoD customer in turn has tie-ups with online book stores like Amazon.com to sell the same and these would start generating a constant flow of revenue from FY09.

With regards the expansion project, the full benefits of the same will only be felt in FY10. Thus, for FY09, growth rates are expected to be in line with the past viz. about 30 per cent.

But post-FY09, since the company will be eligible for zero-tax benefits for the next five years as it is shifting its capacities to an SEZ, the growth in net profit would be higher than revenue growth.

For Vishal IT's 86.92 per cent owned subsidiary, Basiz Fund Accounting Services Pvt. Ltd, prospects look reasonably good. This subsidiary, though very small in size to talk about, caters to the needs of hedge funds, mutual funds, private equity, etc.

The subsidiary earned a profit of Rs 1.15 crore on sales of Rs 2.79 crore in FY08 and has recently received a capital investment of Rs 8.6 crore from Vinod Dham's NEA Indo-US Venture Capital LLC.

Concerns
The company depends heavily on few clients for a significantly large proportion of its revenues "� 56 per cent of its revenues come from the top three clients, one each based in UK, Europe and USA.

Notably, the company believes that a significant portion of its revenues will continue to come from a limited number of clients in the near future.

Apart from currency fluctuation risks, the company has to bear a long operating cycle of 6-8 months as the clients make payment after the milestones of the project are reached.

Lastly, the business in which the company operates does not have any significant entry barriers, which makes it susceptible to competition from domestic as well as foreign players. 
 

MARGIN COMFORT
Rs crore	FY08	FY09E	FY10E
Net sales	40.90	53.13	74.40
OPM (%)	36.40	35.70	34.90
Net profit	12.40	16.12	23.60
NPM (%)	30.20	30.30	31.70
EPS*	11.60	15.10	22.10
P/E @ Rs 140	12.10	9.30	6.30
P/E @ Rs 150	12.90	9.90	6.80
E: Estimates                                    * on Post-issue equity

Valuations
The company's EPS on post-IPO equity stands at Rs 11.6. On the asking price of Rs 140 - Rs 150, the PE ratio works out to about 9.3 and 9.9 times its FY09E estimated earnings, at the lower and upper price band, respectively.

Although a strict comparison is difficult in case of Vishal IT, considering that IT/ITES players like eClerk and Vakrangee are trading between 6 to 8 times their trailing 12-month (TTM) EPS, the issue appears stiffly priced, leaving little for investors to gain in the medium term.

Rating agency CARE has rated this IPO three on a scale of five, indicating average fundamentals taking into account, low entry barrier, highly competitive environment and unproven ability of the company to generate revenue from its foray into digital library and PoD markets.

The key to the prosperity of Vishal IT remains in sustaining its profitability. Investors would be better off, to give this issue a miss.

Issue opens on 21st July, 2008
Issue closes on 24th July, 2008