A raft of issues

3i Infotech's price band seems reasonable

3i Infotech, formerly ICICI Infotech, will hit the IPO market next week to raise between Rs 180 and 230 crore.

The primary aim of the issue is to repay high-cost debt to the tune of around Rs 94 crore. After accounting for issue expenses, the balance amount of Rs 80-130 crore will be used to redeem preference capital.

The company has redeemable preference shares worth Rs 150 crore outstanding. 3i spends close to Rs 20 crore to service its debt and preference capital.

Plans to retire both the debt and preference capital would boost the earnings available for equity shareholders from current levels of about Rs 12-15 crore.

Thus, even though the 3i issue seems rather expensive relative to FY05 earnings, the valuation seems more reasonable using estimated FY06 earnings.

The company's annualised EPS based on earnings for the nine-month period ended December 2004 works out to Rs 3.5. Based on these numbers, the valuation is rather demanding at 25.7 to 28.6 times.

But, as pointed out earlier, earnings are expected to jump a huge margin in FY06. The repayment of high-cost debt and preference capital itself will result in earnings jumping by over 100 per cent from current levels.

Besides, there's plenty of room for a cut in selling, general and administrative expenses. SG&A expenses accounted for 26.7 per cent of revenues in the nine-month period ended December 2004, because of which 3i's operating margin is relatively low at 16.25 per cent.

The company's gross margins were impressive at 42.9 per cent. The reason SG&A expenses are high is the company has spent aggressively on sales and marketing in order to build its non-ICICI client portfolio.

Going forward, SG&A expenses are expected to be flat to marginally higher from current levels. As a percentage of sales, therefore, there would be considerable savings.

Already, these expenses have trended downward from 34.9 per cent in FY03 to 30.8 per cent in FY04 and 26.7 per cent currently.

As a result, profit attributable to equity shareholders is expected to jump by over 200 per cent and earnings per share is expected to be around Rs 9 per share in FY06, after accounting for the dilution in equity.

Based on this, the issue is prices between 10-11 times, cheaper than the average discounting of about 13-14 times for most tier-II IT companies.

Saksoft

Why would an ex-Citibanker who later promoted Nation Wide Finance (the small-ticket lender that was picked up by Citigroup and became part of its global Citifinancial arm) need to tap the market for an IPO of a mere Rs 7.5 crore?

One would have assumed that a few phone calls to private equity fund managers would have fetched him the sum. Saksoft managing director Aditya Krishna agrees, but says that he wants the discipline that a market listing brings.

Saksoft, a Chennai-based five-year old software company in the banking and financial services space, is issuing shares at Rs 30 per share. People in the company candidly point out that listing will unlock the value of ESOPs, and enable using the scrip as currency for possible acquisitions.

Earnings for the first six months of FY05 have been Rs 5.54 on a standalone basis, and Rs 4.44 on a consolidated basis, which means that, on an annualised basis, the issue is pretty cheap, even if one takes into account the 33.3 per cent dilution.

The only concern is the dip in 2004 revenues and profits, but the management says that that is because they ramped up capacity too soon, and the benefits are flowing through in the current year.

Also, while the company has several big banks as its clients, Citibank accounted for 37 per cent of total business, and the moving of a part of Citi's Singapore operations to India led to the drop in revenues last year. But that's been more than made up this year.

With contributions from Mobis Philipose and Amriteshwar Mathur