An expensive offer

IPO REVIEW

Though Compulink Systems is into the fast growing service execution management space, valuations look stretched.

Compulink Systems, an IT software products and services provider, hit the capital market with an initial public offer of 45.38 lakh equity shares on November 25. The offer comes at a price of Rs 60 aggregating to Rs 27.23 crore.

Compulink Systems is small in size compared to many of its IT peers. While the company's claim to fame is that it provides intellectual property (IP) "� based solutions in the services execution management space (SEM), the offer comes at a valuation of 17.24 (P/E based on post equity dilution basis) on FY05 earnings.

Considering that Compulink endured losses for the first half of FY06 and its small size, the offer looks expensive.

The business

The promoters Vishwas Mahajan (managing director & CEO) and Uday Kothari (chairman & CTO), both experienced IT professionals, started the company in a garage in Pune.

From a five-man team in 1996, Compulink today employs over 100 IT professionals at its Pune Centre. It currently has a capacity to seat nearly 350 personnel. The company plans to use the proceeds of the issue for product development, international marketing apart from paying off term loans.

Compulink Systems is involved in providing software services, developing IT products and delivering project management training and consulting. After working with mid size software product companies, Compulink shifted focus to Microsoft technologies to create business applications in multiple domains such as healthcare, insurance, entertainment, education and financial services. In 1998 Compulink became a Microsoft solution provider.

Later on the company moved on to developing its own specialised applications such as its flagship product, ProjectByNet. ProjectByNet facilitates collaboration between client and project teams and provides real-time information on the status of programs and projects.

Some of the largest software companies such as Accenture, Datamatics, Geometric, MphasiS apart from Tata group companies, Tata Consulting Engineers and Tata Industries are users of ProjectByNet.

Compulink's other products include Whizible SEM (execution management solution), CertifyByNet (on-line skill evaluation and certification exam simulation portal) etc. Compulink has already licensed its products to over 75 service oriented organisations and has a licensed base of over 29,000 users.

According to a NASSCOM survey, Indian IT services market has grown by 25 per cent (CAGR) in the period between 2001 and 2005. The product and technology services opportunity is poised for big growth and is estimated to reach $8-11 billion by 2008. However, with any number of large players in the market, small players like Compulink face a challenge.

Concerns

According to analyst Phani Shekhar of Angel Broking, though SEM offers exciting prospects in terms of growth, viability of SEMs for standalone third party vendors such as Compulink is debatable.

"Also, big services oriented companies like Infosys and TCS etc. have devised their own methods of managing their services, across resources. This means that companies like Compulink will find it difficult to bag orders, since they don't have the expertise. "The prospects of this business model in a complex area like service execution management itself is not clear,"says Shekhar.

Financials

The company reported a total income of Rs 12.87 crore for FY05, while the net profit stood at Rs 3.61 crore. While y-o-y growth has been impressive, with topline and bottomline growing by around 60 per cent, Compulink suffered a set back in the first half of FY06 as it reported net losses, as operating expenses went up.

The company has attributed the loss to the investments made in increasing headcount, product development, marketing and the development of its new centre at Pune. Compulink has posted a CAGR of 45 per cent in topline and bottomline in the FY2001-FY2005 period. 
 

FINANCIALS
In Rs crore	FY05	FY04	% change	H1FY06
Total income	12.87	8.05	59.88	5.38
Operating profit	3.86	2.36	63.56	-0.61
OPM (%)	29.99	29.32	-	-
Net profit	3.61	2.24	61.16	-0.64
Net margin	28.05	27.83	-	-
EPS (Rs)	5.66	3.57	-	8.95
P/E@Rs 60	10.60	16.81	-	-

However, analysts believe that the company may find it difficult to maintain such a performance going ahead as SEM market gets crowded and the company faces a larger base effect.

At the fixed issue price of Rs 60, the offer commands a P/E of 17.24x, based on the FY05 EPS of Rs 3.48 (post equity dilution). According to Shekhar, considering the uncertain outlook and concerns about the company's scalability, the offer looks expensive.

Offer closes: November 30, 2005