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Monday, July 21, 2008

Vishal Information Technologies - IPO Analysis

Given its growth prospects and sound management, investors with a two-year horizon can consider Vishal Information Technologies’ IPO
COMPANY: VISHAL INFORMATION TECHNOLOGIES
ISSUE SIZE: Rs 39.1-41.9 CRORE
PRICE BAND: Rs 140-150
DATE: JULY 21-24, ’08

CHENNAI-BASED non-voice BPO service provider, Vishal Information Technologies (VITL), is hitting the primary market to fund its expansion plans, including setting up a bigger campus and marketing offices in the US and UK.
Out of 27,90,000 shares that will be offered to the public, 17,90,000 are fresh, while the rest will be offloaded by the existing promoters. Post-listing, the promoters’ stake will decline to 42.9%from 51.5%.

BUSINESS:
The Rs 41-crore VITL is a subsidiary of Tutis Technologies. VITL provides IT-enabled services (ITeS) in the areas of data digitisation, e-publishing and digital library. These services fall under the non-voice category of the ITeS segment. VITL has a subsidiary called Basiz Fund Accounting Services, in which it holds 86.9% stake. Basiz provides sub-fund accounting and administration services to hedge funds, private equity firms, mutual funds and insurance companies in various countries including the US, UK, Hong Kong and Singapore.

VITL derives more than 98% of its revenue from overseas clients. The UK is the company’s biggest market, contributing three-fourths to its total revenue. Among its three verticals, data archiving accounts for 60% of its topline, while epublishing contributes 30%. The rest comes from Basiz. Though Basiz contributes to just over 10% of VTIL’s business, it provides a much better operating margin of 45%, compared to 25-30% for other verticals. Revenues from services, including archiving and e-publishing, are project-based and hence, lumpy in nature. To reduce its exposure to this lumpiness, VTIL is focusing its attention on print-on-demand (POD) and digital library services. These services are recurring in nature and hence, provide higher revenue visibility.

FINANCIALS:
VTIL’s topline and bottomline have shown a compound annual growth rate (CAGR) of 31% over a period of four years ended March ’08. Along with a sustained growth rate in sales and profit, the company has also maintained healthy margins. Its operating margin improved from 32% in FY04 to 36% in FY08. Its net margin has more or less remained flat at 30% during this period. However, compared to FY07, its net margin shrank by 220 basis points due to the imposition of minimum alternative tax (MAT) on IT companies.

VALUATIONS:
On a post-issue basis, the company is asking for a valuation of over 13 times its FY08 earnings, considering the upper side of its price band. This is rather high compared to the price-earnings (P/E) multiple of 7-9 for companies such as Datamatics Technologies and Tricom, which provide digitisation services. The higher valuation of VTIL can be attributed to its stable financial performance and future prospects.

The company is working on a pilot project with Royal National Institute for the Blind (RNIB), UK, to provide digital library services. Further, it has tied up with leading book publishers in the UK and US for POD services. These two new lines of businesses, along with existing ones, are expected to maintain the company’s growth momentum. Investors with a two-year horizon can consider this IPO.

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