Acropetal Technologies IPO Analysis

Acropetal Technologies was incorporated in 2001 by Ravi Kumar in Bangalore and received 100 % EOU (export oriented unit) certification in January 2003. The initial focus of the company was on engineering design services. The company offers a broad spectrum of engineering design services to reduce product design cycle time and costs. The portfolio of services includes concept design, product design & development, advanced analysis, reliability engineering and value engineering. Product quality improvement, idea generation, product teardown, material cost out, product re-design, back office support to accomplish 2D drawings, data conversion and



3-D modeling value-added services are offered to the customers.

IT/ITES solutions in the enterprise space allow organizations to optimize their core business activities like resource management, customer relationship management and supply chain management. The company helps organizations to improve their business processes, functions through the effective application of enterprise solutions that align with organization's business objectives and strategies. Together with the group companies, the company endeavors to meet the customer's business needs with end-to-end solutions for small, medium and large businesses.

Acropetal is currently working on the following competency based verticals

* Engineering Design Services
* Healthcare Services
* Enterprise & IT Services
* Energy & Environment Services
* IT Infrastructure Management Services
* IT Security Consulting Services

The company intends to enter capital market to raise Rs 170 crore by issuing around 1.93 to 1.89-crore equity share of face value of Rs 10 each at the price range of Rs 88 to Rs 90 per share.

The proceeds from issue includes Rs 55 crore for potential acquisition, Rs 26.19 crore to set up a software development centre cum corporate office, Rs 19.45 crore for expansion & establishment of overseas offices, Rs 25 crore for part repayment of term loans, Rs 25 crore for working capital requirements, Rs 15 crore for public issue expenses and Rs 4.6 crore for general corporate expenses.

In terms of vertical, EDS (engineering design services) contributed 48.47 %, IT services contributed 49.05 % and healthcare contributed 2.48 % during FY 2010.

For the nine months period ended December 2010, EDS contributed 37.77 %, IT services contributed 28.94 % and healthcare contributed 33.29 %

Geography wise, during FY 2010, United States contributed 75.5 %, Middle East contributed 12.94 %, Europe contributed 7.96 % and Asia contributed 3.6 %

The same figures stood at 75.5 % for United States, 12.94 % for Middle East, 7.96 % for Europe and 3.6 % for Asia during 9M FY 2011.

For FY 2010, the Top 5 clients contributed 82.65 % and the Top 10 clients contributed 95.62 % and 98.44 % revenues came from the Top 5 and 99.5 % from the Top 10 during the nine months ended December 2010.

As of January 20, 2011, there are 540 employees with 25 in management, 483 in technical, 7 in tech support and 25 in office support/other staff.

Strengths

* Focused on four major industry segments: The current offerings are focused on four major industry sectors: Infrastructure, BFSI/Retail, Health and Energy. The company intends to offer complete end-to-end solution catering to these market segments. It believes that the comprehensive range of offerings will help the company to obtain additional business from existing clients as well as address a larger base of potential new clients.

Weaknesses

* Pre-issue, the company has consolidated debt of Rs 131.96 crore as of December 2010 with debt: equity ratio of around 1:1 which is high for a software company.

* Consolidated DSO (days sales outstanding) for FY 2010 stands at 138 days, which is relatively high.

* On standalone basis, the company's net profit has grown at a CAGR of only 15% in the last three years.

* Substantial portions of sales have been dependent upon a few customers. The loss of any one or more of our major customers would have a material adverse effect on the business operations and profitability.

* Reduction or termination of the tax incentives will increase the tax liability and reduce profitability.

* On August 27, 2008, the company had acquired a 20.48 % stake in Binary Spectrum Softech Pvt Ltd. The said acquisition representing 4,080 equity shares of Binary Spectrum Softech Pvt Ltd (having face value of Rs. 10 each) was carried out for a total consideration of Rs 5.1 crore , i.e., at a price of Rs. 12,500 per equity share when the book value per share as on March 31, 2008 was Rs. 89.35 only.

Valuation

At a price band of Rs 88 to Rs 90 per equity share of Rs 10 face value, the P/E works out to around 9 times the consolidated nine-months (ended December 2010) annualized EPS of Rs 9.6 – Rs 9.9 (on post-IPO equity). In Computer Software-Medium/Small Industry, industry composite TTM P/E is at 12.4.