Educomp Solutions - Indiainfoline

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Celebrity Fashions - IPO Analysis

Costly fashion

Aiming to push up exports as well as domestic retail sales

Celebrity Fashions (CFL) designs, manufactures and sells men's garments, catering to leading international brands and also to the domestic market through own brand, Indian Terrain. Set up in 1988 as a small 50-machine factory with 72 people in Chennai, the company has grown to eight factories (4,283 machines), housed over 300,000 square feet, employing over 5,000 employees.

The IPO will raise Rs 72.8 crore to Rs 81.9 crore. CFL proposes to spend Rs 46.26 crore to finance the acquisition of Ambattur Clothing, with a capacity of 6 million trousers per annum, and Rs 9.34 crore to set 20 exclusive Indian Terrain stores over the next three years. Moreover, the company will set up a new factory at Irrutgattukottai to manufacture tops with a capacity of 920 machines at a cost of Rs 23 crore. The company will utilise Rs 18 crore for working capital.

Strengths

• The abolition of the quota regime has opened new growth avenues for export-oriented garment companies such as CFL.

• The Indian retailing industry is set to grow and CFL, which has built its brand,is well positioned to ride the boom.

Weakness

• CFL’s revenues are highly dependent on a limited number of buyers. For example, its top most customer contributes nearly 32% of its export revenue. The loss of business from any one of its major buyers may adversely affect the top line and bottom line.

• CFL’s Indian operations, consisting of sales from Indian Terrain, were making losses till FY 2005 due to the high advertising expenses. They have started making profit from the current year.

• Bennet, Coleman and Company has been allotted 7.34% of the post-issue equity at Rs 110 (post-bonus), for which CFL would receive benefit over the next three years.

• CFL plans to spend huge amount on advertising.

• There are no plans to enter new segments like women’s wear or kids’ wear.

Valuation

In FY 2005, CFL reported a profit of Rs 5.80 crore with an EPS of Rs 3.2 on diluted equity. The PE ratio stands 50 times at the lower end of the offer price (Rs 160) and 56 times at the higher end (Rs 180). Gokaldas Exports and Zodiac Clothing, much better placed than CFL, are trading at PE of 19 and 31 times, respectively.

The first half results of FY 2006 give an annualised EPS of Rs 5.8. Considering this EPS, PE will be 27 to 31 times. On the same basis, PE on an annualised EPS of Gokaldas Exports and Zodiac Clothing is 15 and 33 times, respectively. As recently as October 2005, CFL allotted equity shares at Rs 110 to private equity investors.

Educomp Solutions IPO Analysis

Good market potential

Focus areas have good growth success in the US can open up huge opportunities

Educomp Solutions is promoted by the husband and wife team of Shantanu Prakash (IIM, Ahmedabad alumunus) and Anjlee Prakash (PHD in education). Headquartered in New Delhi, Educomp employs more than 850 professionals and has a presence in 27 locations in India. It has a fully owned subsidiary in the US.

Educomp Solutions focuses on K-12 (Kindergarten to Class 12) education. It mainly operates in four segments, Smart Class, Professional Development, ICT (Information Computer Technology) and Others (Retail). Smart Class is a technology-enabled learning solution, which caters to private schools in India under the BOOT (build, own, operate and transfer) model. In FY2005, this segment contributed around 8.5% (Rs 2.95 crore) of the total revenue and 3.5% of the total gross profit (Rs 63 lakh), with a gross margin of around 21.4%. The company is also planning to increase its presence in the US market through this product in the coming years. However, in the US market, only the content solution will be provided under license to private schools, and not the hardware as is done in the Indian market.

The professional development segment focuses on training teachers, by providing them skills in inquiry-based learning, creative thinking, and building problem-solving skills among students. In this segment, Educomp partners with Wipro, Microsoft, and the Azim Premji Foundation. This segment contributed around 30% to the top line in FY2005 and 40% to the gross profit, with an impressive gross margin of around 65%.

The ICT business segment caters to government and state schools in India. In this segment, Educomp Solutions enters into a long-term (usually five years) contract with the government schools to provide the entire IT solution for schools / institutes covered by the contract. The contract is a BOOT arrangement, translating all assets to the school at a nominal residual value at the end of the contract period. The payment terms are usually on a quarterly basis. The company has worked with a number of states in India such as Karnataka, Tamil Nadu, Andhra Pradesh, Assam and Orissa. This segment contributed around 38% of the total revenue in FY2005, and 20% of the gross profit, with gross margin of around 25%.

The forth segment is meant for catering the retail market, with a range of toys like Playgo, and Learning Road and educational CDs. Educomp Solutions plans to launch a chain of retail stores, "Play – n – learn", on a franchise model. The first of such stores has already been launched in Gurgaon, Haryana.

There are some other businesses like online tutoring for the US market, learning portal PlanetVidya.com, campus management system, eCampus, and annual maintenance contracts. The other business segmenst contributed around 24% of the total revenue with a gross margin of 88%, generating 41% to the gross profit in FY2005.

The proceeds of the current IPO will be utilised to fund the capex required for the Smart Class project (Rs 15.93 crore), capital expenditure for the Education Infrastructure Projects (Rs 30.83 crore), capital expenditure for the content development facility in Bangalore, India, for US Smart_Class project, (Rs 10.98 crore) and investment in US subsdiary (Rs 8 crore). Educomp Solutions has also earmarked Rs 10 crore for acquisition.

Strengths:

The market size is apparently huge as computer literacy is still very low and an increasing number of schools and state governments are realising the need to provide computer literacy and computer aided learning to students as well as teachers.

Over the next few years, Educomp Solutions plans to expand its global business with a focus on North America. It will also build on its existing initiatives to provide digital content to schools as well as online tutoring in the US, which is the world's largest education market, with a K-12 content spend of over $10.2 billion (2004 figures) and an online tutoring market spend of over $4 billion.

Weaknesses:

Educomp Solutions derived around 32% of its total revenue from the orders placed by trusts managed by the related parties. In FY 2005, Rs 10.29 crore of income (32.06% of total income) was generated from trusts and in the April-June quarter of FY2006; Rs 1.99 crore of income (36.64% of total income) was generated from trusts.

In the last three years (till FY 2005), the top line of Educomp Solutions grew at a CAGR of only 16% to Rs 33.13 crore. Net profit spurted from Rs 1.26 crore to Rs 7.93 crore, mainly due to the jump in the operating profit margin to 47.6%.

Educomp Solutions business is seasonal and most of the revenue and profit is booked in the second half, specially the fourth quarter.

Valuation:

The offer price band of Rs 110-125 discounts FY 2005 EPS of Rs 5 on post-issue equity capital by 22 to 25 times. The PE is high for a small company. But considering the market size in India and the US market opportunity, the offer looks interesting.

Bartronics India - IPO

Price is a big bar

The value-added reseller in a niche field is going for acquisition-based international growth

Bartronics India (BIL), a leading automatic identification and data collection (AIDC) and radio frequency Identification (RFID) solutions provider, is entering the capital market by issuing 65 lakh equity shares through a 100% book-building offer. The price band has been fixed in the range of Rs 63 to Rs 75. With the money raised through this issue, the company plans to enhance its technological base through R&D capability and to expand its business overseas.

The company ‘s current promoters are A B Satyavas Reddy and R Satish Reddy, both of whom are technocrats with about a decade of experience in various industries.

The business

BIL offers consulting services, design, software, hardware, customisation and full implementation of integrated and tailor-made AIDC- and RFID-based systems. The company also provides business and technology strategy, systems design and architecture, applications implementation, network and systems integration in this field.

BIL has three business segments: AIDC Solution, RFID Solution and Retail Solution. In the AIDC solution segment, the company provides bar code- and biometrics-based solutions, where the data related to the process flow get automatically fed into the computer system of the client. In the RFID solution segment, similar solutions are provided through RFID technology. However, in the Retail solution segment, inventory management solutions are offered based on both bar code- and RFID-based technology.

All the major equipment required for the solutions are imported. BIL provides the middle-ware solutions along with the imported hardware so as to integrate the systems to the requirement of the client. On an average, hardware constitutes approximately 60% of the contract value.

In FY 2005, BIL generated 80% of its revenue from the AIDC, 15% from RFID and 5% from Retail business. In half year ending September 2005, the contribution was 50%, 40% and 10%, respectively. Going forward, the revenue contribution will tilt more towards the RFID and Retail segments. On an average, the annual maintenance (AMC) revenue constitutes 20% of the company’s turnover and 60% of the business comes from repeat orders.

Project cost

For its new initiatives, BIL has planed a project cost of Rs 29.8 crore. Of which, a significant part goes to the establishment of the R&D center and international expansion. The company is raising Rs 34 crore to Rs 40.5 crore from the public issue. The surplus money will go for acquisition, for which Rs 4.5 crore has been earmarked.

Strengths

*BIL operates in a niche area of AIDC business, which is essential for the automated business processes of today. The implementation of organisationwide ERP software has made the requirement of automatic data-capturing and feeding to the automated systems essential for enhancing the pace of the business processes for organisations.

* Established in its field, BIL has a reputed clientele including corporate houses Tata Steel, Tata Motors, HLL, ITC, Ashok Leyland, TVS, CMC, Ranbaxy, Compaq, VST, Whirlpool, ITW, Dr.Reddy’s, and Nagarjuna Construction. .

* The recent focus on RFID technology, which will replace some bar code-led business, will enhance BIL’s scope of repeat business along with new business.

*The government of India favors foreign direct investment in the retail sector. Bar code technology plays a very important role in this sector. The hardware and software tools of this technology have become essential for retailing. With its experience, BIL is at an advantageous position to meet the demands of the retail sector.

Weaknesses

*The bar code business has reached saturation in the country. Therefore, the growth for BIL will come from adding more international clients and enhancing the RFID business. The company is targeting acquisitions abroad to enhance its international exposure. However, any overseas business, and that too based on acquisitions, involves risks.

*The technological depth of the business is low. It is more of a value addition. So the entry of global players with good technological depth is a threat to BIL’s new RFID business.

*All the service contracts entered by BIL are based on fixed price. Also, the project-based business model requires significant working capital till completion. Notably, the general contract size spans more than 180 days. In this context, any rise in cost of the project may affect the margin.

Financials

In FY 2005, BIL reported sales of Rs 18.06 crore and net profit of Rs 2.4 crore. Compared to the previous year, the operating profit was marginally affected due to rupee-dollar volatility. The company imports all its raw materials. In half year ended September 2005, BIL reported sales of Rs 12.77 crore and net profit of Rs 2.68 crore.

Valuation

*At the issue price of Rs 63 on an expanded equity of Rs 14.57 crore, the first half FY 2006 annualised EPS works out to Rs 3.7. PE stands at 17. At the issue price of Rs 75, PE works out to 20. There is no comparable listed player and PE is high for a small company.