Taksheel Solutions IPO Analysis

Taksheel Solutions was incorporated on 23 September 1999 as IBSS Techno-Park Private Limited in Hyderabad, Andhra Pradesh, under the Companies Act, 1956. The name was changed to Taksheel Solutions Private Limited on 29 November 2006. The company was converted into public limited company in December 2006. It is engaged in the business of providing information technology services to wealth management service providers.

In 2007, Taksheel acquired clients of Dataformix Technologies Inc., which enabled it to establish its foothold in the data warehousing & business intelligence business. In 2009, Taksheel acquired telecom software products from Verisoft Business Solutions Pvt. Ltd. Taksheel has acquired products in IP multimedia system (IMS), telecom signalling integrated standard digital network (ISDN), channel associated signalling (CAS), signalling system 7(SS7), short message service centre (SMSCs), least cost routing system (LCR), optimal routing solutions (ORS), voice mail servers (VMS) and other value added services (VAS) content delivery platforms.



The company's solutions/services, in general technical areas, include the following:

Wealth Management Solutions
Telecom Solutions
Application Development & Maintenance
Data Warehousing & Business Intelligence
Offshore Outsourcing

Wealth management technology solutions are built on service-oriented architecture (SOA), enabling to rapidly deploy a customized version of the solution to help clients better manage their customers' assets, increase their sales, improve their service and generally lower their operating costs. In addition, company's financial technology solutions practice provides end-to-end cycle of designing, developing and implementing the clients' software applications in a wide variety of architectures and platforms to financial institutions such as Asset and Investment managers, brokerage houses, insurance, hedge funds, trusts and family offices.

The promoters of the company are Ramaswamy Kuchana and Pavan Kumar Kuchana (Individuals) and Lexicon Pvt Ltd (corporate promoter, a holding company 100% owned by Pavan Kumar Kuchana). Pavan Kumar Kuchana is the present chairman and managing director of the company.

The company is in the process of expanding operations and has recently started operations from Delaware, USA. It already has presence in India and New Jersey, USA, and proposes to expand operations in Asia-Pacific markets and Middle Eastern countries.

The company intends to enter capital market by issuing around 55-lakh equity share of face value of Rs 10 each at the price range of Rs 130 to Rs 150 per share.

The proceeds from issue will finance Rs 9.16 crore for setting up of a new SEZ software development centres in Hyderabad and Rs 8.66 crore for setting up of a new SEZ software development centres at Warangal, Rs 22 crore for acquisitions and other strategic initiatives, Rs 12.8 crore for financing the incremental working capital requirements apart from general corporate purpose and issue expenses.

The turnover as on March 31, 2011, was Rs 147.26 crore, the Profit after tax was Rs 27.42 crore. The total income of Taksheel registered a y-o-y growth rate of around 197% during FY 2011 over FY 2010, primarily due to addition of five new clients during the same period in wealth management solutions vertical. The revenue contribution from the wealth management solutions has grown from 51% of total income in FY 2010 to 71% of total income in FY 2011.

As on March 31, 2011, company derived 82% of its revenue from application services, 9% from data warehousing and business intelligence and the rest from offshore outsourcing.

As of August 10, 2011, there are 65 employees with 50 skilled technician and 15 in sales and administration.

Strengths

11 years of experience in targeted industry segments.

Wide range of wealth management solutions and advantage of early entry.

Weakness

The company derives all of its revenues from United States and hence faces concentration risk.

The company derives a significant portion of revenues from a few customers, and a loss of one or more customers or reduction in their demand for its products and services could adversely affect the business, financials and operations. Top 5 and Top 10 customers contributed 52.1% and 80.22%, respectively, of total revenue during 2010- 11.

The company is currently focusing on a niche segment in overall BFSI (Banking and Financial Service Industry), i.e., wealth management space. The company is focusing on supplying its products and services to players in private banking, mutual funds and brokerage houses, essentially, those who manage the wealth of individuals. This differentiates the company from others but in case there is slowdown in the space due to underperformance of various asset classes, viz. equity, commodities, real estate and others, demand for its products may slow down or even fade.

In past, Taksheel has failed to comply with the regulations pertaining to certain mandatory requirements under the relevant regulations of FEMA in relation to issue of shares to foreign entity by way of share swap, investment in overseas subsidiary, capitalization of export receivables and issue of shares to Lexicon Pvt Ltd. However, the RBI/FIPB has granted ex-post facto approval for the non-compliances. The company has been referred to the RBI for compounding of the offence. In a few cases, the RBI has levied a penalty, which the company has duly paid. In certain cases the company is awaiting response from the compounding authority.

The revenues of the company declined in FY 2009 due to global slowdown. The company had also had negative operating cash flows in the previous years.

The auditor, in its report for FY 2010 and FY2011 qualified that the company is not regular in depositing undisputed statutory dues such as income tax liability for a period of more than six months.

The company has entered into an agreement with one of the investors, Dinesh Kumar Singhi, who has subscribed to 10,00,000 equity shares constituting 6.12% of pre issue paid-up capital and 4.58% of the post issue paid-up capital of the company. This imposes certain onerous obligations on the company with regard to the exit option and exit valuation to such investor.

Valuation

At a price band of Rs 130 to Rs 150 per equity share of Rs 10 face value, the P/E works out to around 10.4 to 12 times FY 2011 EPS of Rs 12.5 (on post-IPO equity). In Computer Software-Medium/Small Industry, the composite TTM P/E is 8.27. Being focused on wealth management technology solutions, the timing of this IPO looks miserable given the current high degree of uncertainties and possible severe slowdown its user industry is facing.