IntraSoft Technologies IPO Analysis

Investors can give the initial public offering of IntraSoft Technologies a miss, given the stiff challenges that the company faces in terms of scalability and ability to attract advertising revenues. The company owns the Web site 123greetings.com (123G).

At Rs 145 (upper end of price band), the company asks for 36 times its likely per share earnings for FY10. This makes the offer quite expensive given that it is the same level that Info Edge (which owns naukri.com), which generates more than 10 times the revenues of IntraSoft, commands.

The company has seen its revenues over a four-year period grow at a compounded annual rate of 11.9 per cent to Rs 23.4 crore in FY09, while net profits grew at 25.7 per cent to Rs 5.3 crore.

The growth in net profits may have been much lower but for stringent cuts in employee costs. For the first half of FY10, the company has managed revenues of Rs10.5 crore and net profits of Rs 3.1 crore.

Just to put that number in perspective, Info Edge tripled its revenues over a three-year period and more than quadrupled its profits.

IntraSoft, which through its main Web site 123G, generates revenues by selling spaces on its Web site to advertisers, has clearly found scalability a challenge as evidenced by its growth rates.

Its current business model may not allow it to garner greater advertising revenues, nor will it be able to ward off competition easily.

Business concerns

123G is a Web site that allows users to send greetings to others. Its revenues are purely derived by offering advertising space in its Web site to companies and individuals. Based on the number of times the advertisement is viewed, companies pay 123G.

This accounts for over 98 per cent of advertising revenues while the rest come from other models such as ‘cost per click' and ‘cost per action' basis.

This model may be unsuitable for rapid expansion. First, 123G is the only product and not one of the products.

To elaborate on this, top Web sites such as rediff, indiatimes, yahoo! and MSN have full-fledged Web sites offering news, business updates, astrology services, sports updates, shopping options and a host of other services for which there are always takers.

This broadens the advertising base and allows for greater ‘per-view' advertising revenues. 123G's user base is likely to be only a small fraction of the overall number of Internet users looking to send greetings.

In addition, social networking sites such as Facebook, Orkut and Twitter as well as instant messaging and chat facilities of Web sites may offer quicker and easier way of greeting people.

Second, Web sites such as yahoo! and indiatimes also offer greetings services to customers. Competition also exists in the form of other specialised greeting card players such as AG Interactive and evite.com and many others. So the ability to hike advertising rates is likely to be limited.

In the US, from where the company derives nearly half of its revenues, Internet advertising is expected to grow by only 6.4 per cent over the next three-four years, according to a report from PWC on Entertainment and Media.

In India, Internet advertising is expected to grow at a healthy rate of 32 per cent to Rs 2,000 crore by 2013, which is still only 5.5 per cent of the overall advertising pie.

Given this relatively small size and any number of global and local Web sites with a host of offerings competing to grab their advertising share, a Web site with a single offering such as 123G would be hard pressed to drive growth.

The offer

IntraSoft is looking to raise Rs 53.6 crore at the upper end of the price band (Rs 137-145). The proceeds are to be spent in branding and promotion and for purchasing a corporate office in Kolkata.