Vishal Information Technologies IPO Analysis

Investors can avoid the initial public offering of Vishal Information Technologies, a company delivering digitisation and E-Publishing services, considering the high valuation that the offer demands and the inherent business risks, given the rough macro-environment.

At Rs 150 (upper end of price band), the offer is priced 14 times the company’s 2007-08 per share earnings on post-offer equity base.

This is at a premium to most BPO/KPO players in the mid and small tier space, which have more diversified service offerings than Vishal Information.

Heavy competition in all segments of its operations, a long receivables cycle, lack of diversification in its service portfolio and client concentration are key risks to the business.

Vishal Information delivers digitisation, e-publishing and digital library services to publishers.

The company has also been able to create digital library formatting for visually challenged people to access books by downloading text from the Internet.

In addition, Vishal has a subsidiary that handles back-end accounting and administrative services for financial services clients.

Vishal Information’s revenues over the last five years have grown at a compounded annual rate of 24.1 per cent to Rs 40.9 crore for 2007-08, while revenues have grown at a rate of 24 per cent to Rs 12.4 crore during the same period.
Business Risks

The absence of diversification from the core business makes the company vulnerable to vagaries of publishing houses’ outsourcing schedules. Competition exists for the company from three sets of players. Large companies that have a diversified KPO services basket in addition to publication services such as RR Donnelley (Office Tiger), Hexaware Technologies and TCS; independent KPO players such as Scientific Publishing and Ninestar Information Technologies that specialise in digitisation; and captive units of publication houses.

In this light, pressure may be on billing rates with clients, and with a rough macro environment, it may only get tougher to stay competitive and maintain margins.

Cushion from diversification in the form of voice and other transaction based services that BPOs/KPOs provide across several verticals is not available to Vishal Information. Technology upgrade may not be as easily possible for a smaller player such as Vishal when compared to well-entrenched players with deeper pockets.

Scalability has also been a problem, a fact supported by the sedate growth rates even during the outsourcing boom phase of 2003-07. Now, in a tough environment with companies cutting on outsourcing budget, the company may feel the pinch even more.

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The company also has high concentration risks with its top three clients accounting for 56 per cent of revenues. In the absence of many long-term contracts or continuously large orders, the company may be subject to fluctuation in results.

Vishal receives its payments for projects only over a six-eight month period, after its clients successfully upload the completed publications on their Web sites.

This large timeline in receivables would significantly increase working capital requirements.

In a rising interest rate scenario, bank borrowings for such purposes would significantly increase expenses on this count.

Considering these aspects, investors may avoid this initial public offering