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AurionPro Solutions IPO - BusinessLine

aurionPro Solutions: Avoid

Krishnan Thiagarajan

INVESTORS could avoid the book-built public offer of aurionPro Solutions made at a price band of Rs 81-90 per share. Even at a lower end of the price band, the IPO is stiffly priced at a price -earnings multiple of 23 times its FY 05 earnings. The pricing may not leave adequate scope for capital appreciation in the medium term. Since aurionPro is expected to focus primarily on the products market for the banking segment, the flight to scale and intense competition in this space will be the principal challenges to growth. Over the past year, scale, size and reach have emerged as the key variables dictating growth in the banking products segment. The services business of aurionPro is aimed at complementing its product portfolio.

The recent acquisition of the Citigroup's equity stake by Oracle in i-flex solutions has raised the competitive bar and heralds the consolidation phase in the banking products space. Some of the mid /small-sized product players that are focussed on niches and competing with the likes of aurion have broad-based their products portfolio to focus on insurance, mutual funds and even ERP solutions to bring in greater predictability to their revenue stream. Moreover, the longer sales cycle (from the start to the closure of a product deal) and higher selling and marketing expenses, especially in penetrating the developed markets, such as the US, leave smaller - sized players more vulnerable to fluctuations in revenue and earnings stream.

aurionPro is coming out with this public offer to raise Rs 24-27 crores primarily to expand its facilities at a cost of Rs 7.8 crores, establish overseas offices at Rs 3.5 crore and finance an incremental working capital of Rs 4.2 crore. The remaining proceeds after public issue expenses are met will be retained for acquisitions. To part finance the project, the company has made a private placement of shares at Rs 150 per share with certain investors to the tune of Rs 3.14 crore.

On the products side, aurionPro is focussed on developing products in the area of cash management, treasury and risk management space for the domestic and overseas markets. It is also engaged in providing customised IT services and support to its clients in the banking arena. The consolidated revenues as of March 31, 2005 stood at Rs. 10.4 crore, with post-tax earnings of Rs 2.7 crore, with a significant jump in revenues in the latest financial year. It has 190 employees as of August 30, 2005.

Given the small revenue base, the scope for growth will be fairly high over the next year or so. However, considering the relative size of the company and its nascent presence in the developed markets, the ability of aurionPro to scale and establish its presence in these markets will present a serious challenge over the medium term. Besides, aurionPro's relatively niche focus on banking products may also pose a challenge as this market is moving away from the best-of-breed solutions towards an integrated solutions market with established global players. This is poised to increase the scope for vendor consolidation and open up greater opportunities for large product vendors to scale-up within banking clients in a modular fashion. Finally, the competition among niche vendors focussed on key areas such as cash management, treasury and risk management has also been growing in the past few years. This is likely to place pressure on margins in the coming years.

The book-built IPO opened on September 27 and closes on October 4. The stock is to be listed at NSE and BSE. The lead managers to this offer are Centrum Capital and Karvy Investor Services.

Paradyne Infotech - BusinessLine

Paradyne Infotech: Avoid

Suresh Krishnamurthy

AN INVESTMENT in the initial public offer of Paradyne Infotech need not be considered. The company's financial performance the past two years has been impressive. The valuation of the stock is also attractive.

Paradyne's market capitalisation, based on the offer price, works out to Rs 42 crore and the price-earnings multiple would be about 9. However, factors such as the lack of well-articulated strategy, excessive dependence on the domestic market for revenues, and the small size of the company increase the risks involved.

Paradyne does not appear to possess any distinct competitive advantage, which is essential for a software services company to sustain itself and grow.

Impressive growth

Paradyne's revenues increased from Rs 35 crore at the end of March 2003 to Rs 68.52 crore at the end of March 2005.

During the same period, profits rose from Rs 31 lakh to Rs 5 crore. The average return on net worth over the past three years is a healthy 35 per cent.

Annand Sarnaaik, a management graduate with no experience in software services, set up Paradyne Infotech in 1997.

The company is into systems integration, software services, managed services and recently entered BPO. Systems integration contributes a sizeable 75 per cent of the firm's revenues. Exports accounted for less than 10 per cent of total revenues. Growth in export sales has, however, been unimpressive.

The bulk of revenue may be generated from hardware sales. Though the company does not indicate the hardware component in the total sales, of the total 102 technical staff employed by Paradyne, 34 are hardware engineers.

Risky prospects

Nothing in the offer document suggests that Paradyne has a competitive edge over its competitors in the domestic software arena. The revenues from the latter are set to grow rapidly given that the Indian industry is expected to grow at 12 to15 per cent per annum in the next several years.

Without competitive advantage or size, Paradyne may find it difficult to take advantage of the growth prospects for domestic software services. Its management strategy is also not well articulated.

Paradyne sees itself as an integrated IT solutions provider. The company's size, however, makes such claims look lofty and suggests that it lacks a focussed strategy.

The offer document also does not clearly indicate what proportion of the profits is accounted for by systems integration, which is hardware intensive and the competition is quite intense in India.

There is also no mention of the company's performance in the quarter ended June. Paradyne has indicated that it has orders for Rs 12 crore as of end-September. This works out to a substantially small proportion of the total revenues for the year ended March. These risk factors considerably dilute the attractiveness of the offer.

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