Intrasoft Technologies IPO Review

Intrasoft Technologies, promoted by Arvind Kajaria and Sharad Kajaria, was originally incorporated as Regency Extrusions & Plastics Private Limited in 1996 to carry on plastics business. The name was changed to Intrasoft Technologies in 1997. The company provides electronic greeting card services through the principal website, www.123greetings.com, which is one of the leading electronic greeting card websites. The domain name is owned by its subsidiary, 123Greetings.com, Inc, and operated by the company. The company believes that its substantial user base (65% women) and emphasis on enabling social expressions on celebratory and social occasions make online gifting and related e-commerce activities a logical next step for its website.

The company is, therefore, exploring the possibility of offering online gifting services on the website. Along with e-commerce, it is also coming out with new features like 123Greetings Studio, which allow users to upload their own designed cards, address book. By storing addresses and e-Invitations, users can send bulk invitations for parties, ceremonies etc. The management expects traffic to grow on the back of these features. The management expects the cost for setting up e-invitations at about Rs 8 crore.

The company derived 89.91% of its revenue from online advertising in FY 2009 and 85.92% in the six months ending September 30, 2009. All advertising is cash advertising. There is no reciprocal advertising. The advertisers are mainly from the entertainment, retail, IT and internet industries including travel, job, matrimonial and games portals. The company also receives additional revenue by providing certain software development services to third parties and advertising revenue from other websites. US contributed 50.63% of the revenue in the six months ended September 2009 and 67.26% for FY 2009. The management expects the share of revenue at 65% from US, 30% from India, and 5% from rest of world.

During the nine months ended December 31, 2009, around 147 advertised with the company and in FY 2009 149. The advertising contracts are for periods ranging from one month to a year. Advertising is mostly based on the fixed fee model based per every thousand times that an advertisement appears on its website (95.48% for FY 2009 and 98.71% for the six months ending September 30, 2009), with the remaining through the cost per click (CPC) model and cost per action (CPA) model.

The company also operates 123india.com, which offers news, finance, cricket etc. It also provides online advertising development, integration and customization services to clients. Because of the high cost of assimilating news, the company currently has no plans to monetize this website.

Currently, most of its content is in English. The company has a team consisting of 16 creative professionals, who develop in-house content including artistic, photographic and musical content for its electronic greeting cards. It has a range of over 20,000 electronic greeting cards covering over 3,000 every-day and seasonal categories including rich and diverse multimedia content and are designed to cater to varying geographical and religious celebrations, occasions and other events. The website is refreshed automatically every 15 minutes. The company uses a robust and flexible hardware and software technology platform to ensure that its website and its electronic greetings services are capable of supporting large and varying numbers of users. The company's cloud computing based technology platform hosts its data and applications on remote infrastructure and is scalable and availed by it as and when required. This enables the company to draw upon varying amounts of hardware and software resources to support the varying number of visitors to its website, preventing wasteful expenditure during times of low user traffic.

Strengths

* The company's website www.123greetings.com is one of the leading electronic greeting card websites. According to ComScore Media Matrix, as derived from comscore.com on February 2, 2010, the website was the largest (by number of unique visitors) electronic greeting cards website in India with a sum total of 1,50,33,248 unique visitors during the twelve months from November 2008 to October 2009. The company's website received a sum total of 20,83,30,810 page views and 186 million minutes during this period, according to comScore Media Matrix ,derived from comscore.com on February 2, 2010. Globally, according to comScore Media Metrix, derived from comscore.com on February 2, 2010, the company's website was the second largest (by number of unique visitors) electronic greeting cards website in the world with a sum total of 9,12,55,566 unique visitors, with an average of 3,96,910 daily visitors and a sum total of 16,11,78,000 visits during the twelve month period from November 2008 to October 2009.

* The company has seen good improvement in operating margins from 17.6% in FY 2005 to 26.3% in FY 2009. It has further gone upto 39.8% in the first half of FY2010. The company's cloud computing based technology platform hosts its data and applications on remote infrastructure, which is scalable and is availed by it as and when required. This enables the company to draw upon varying amounts of hardware and software resources to support the varying number of visitors to its website, while preventing wasteful expenditure during times of low user traffic.

Weaknesses

* Of the IPO proceeds of Rs 50.69 – Rs 53.65 crore, about Rs 20.36 crore are to be used towards brand & promotion and Rs 13 crore is to set up of corporate office. This would go to the expense line items of the company. The company would be amortizing these over the next 5 years. The reciprocal growth may not be assured. The balance proceeds of Rs 15.53 – Rs 18.49 crore, after deducting for issue expenses, would go to the cash & bank balance and would earn investment income, which would pull down the return on equity of the company. This amount is over and above the net cash (after deducting debt) of Rs 15.58 crore the company holds.

* Advertising expenditure forms part of discretionary expenditure of most of the advertisers. The online advertising market is highly prone to economic downturns. The downturn would mean an adverse impact on the spending power of companies, which have increasingly become conservative in their expenditure.

* The market for online card is highly competitive. There are no substantial barriers to enter this market.

Valuation

Intel Capital (Mauritius) holds 12.2% of the post issue share capital at a price of Rs 109.57 per share. The money was invested in December 2007.

The company has treasury stock of 17.5 lakh or 11.9% of the post issue equity held in a trust. These shares can be sold by the company, which would lead to increase in free float at the stock exchanges.

At the issue price of Rs 137 – Rs145 on the FY2009 consolidated EPS of Rs 3.6, the PE works out to 37.9 – 40.1 times. On annualised half-yearly consolidated EPS of Rs 4.2, the PE works out to 32.6 – 34.6 times. However, annualising would not give a correct picture as the second half is better than the first half due to festival season. There is no comparable listed company. Such companies can get abnormally high valuations if they can report sharp growth rates on consistent basis and market conditions are favorable. However, till now, in spite of very small size (FY2009 revenue only Rs 21.39 crore), growth rate has not been exciting enough to justify the asking P/E.