Investors can avoid the initial public offering being made by Cambridge Technology Enterprises at an offer price of Rs 38 per share. Though the business opportunities linked to the company's niche focus on service oriented architecture (SOA) are huge, the risks associated with taking an exposure in a small-size company outweigh the scope for attractive returns.
From an investment standpoint, the scale-up challenges that hinge on an acquisition-led strategy, high client concentration, prospects of vendor consolidation and intense competition from multinational and frontline Indian vendors, are likely to be significant. Moreover, the portfolio basket for investment in the IT services space has widened considerably in the past couple of years, even in the mid-cap segment. With more mid-cap IT stocks in the IPO pipeline, investors can give this offer the go-by.
The relative assessment of strengths and challenges linked to this offer are:
Strong business prospects: Since the company is focussed on the emerging area of Service Oriented Architecture (SOA), the business opportunities linked to this are immense. SOA, a flexible and adaptive model of service delivery on an open platform, is being adopted in a big way by companies such as Oracle through its Fusion Strategy, SAP through NetWeaver, and IBM via Websphere. As a part of its project contours, Cambridge Technology plans to set up competency centres for Oracle, SAP and IBM.
For the 15 months ended March 31, 2006, the company clocked revenues of Rs 18.4 crore and post-tax earnings of Rs 3.84 crore. Given the relatively low revenue base, the scope for rapid growth from these levels is fairly significant.
Scale constraints: From the scorching growth of the frontline vendors seen over the past decade, it is clear that small vendors are likely to suffer distinctly from scale disadvantage. The key constraints linked to scale are vendor consolidation affecting small-size companies, lower bargaining power in billing rates and greater pricing squeeze in a slowdown situation.
With a staff strength of 90 (which is to be expanded to 350 over the next two years), the company's ability to manage large and complex projects also remains untested.
High client concentration: According to the offer document, the top five clients in 2005 accounted for 75 per cent of its revenues and in the first quarter ended June 30, 2006, 54 per cent of the revenues came from two customers. In addition, all its revenues accrue from clients in the US, with hardly any geographic spread.
While this may be true for most small companies, it leaves them highly vulnerable to either the loss of a principal client or a slowdown situation.
Since Cambridge Technology is also focussed on mid-size clients in the US, any significant ramp up in client base may involve a sharp increase in selling and marketing expenses, as its revenue base starts growing.
Acquisition risks: Since 50 per cent of the offer size is allocated for acquisitions, the risks associated with picking the right target for acquisitions and integrating it with its existing operations are quite high.
Offer details: Out of a project cost of Rs 30.70 crore, Rs 15.50 crore or about 50 per cent has been earmarked for acquisitions. The remaining is spread between expansion of facilities (Rs 4 crore), competency centres (Rs 1 crore), reusable components library (Rs 1.95 crore) apart from other support infrastructure and working capital.
This project is being financed through the IPO proceeds of Rs 24 crore, with the promoters contribution of Rs 8.57 crore (at the offer price) and balance from the public. UTI Bank is making a term loan of Rs 4.7 crore and Rs 2 crore is the proposed investment from CellExchange Inc., its holding company till April 30, 2006 prior to corporate restructuring.
The application must be for a minimum of 150 shares and in multiples of 150 thereafter.
The offer price of Rs 38 is payable on application. The lead manager to the offer is Centrum Capital. The offer opened on December 29, 2006 and closes on January 9.