AurionPro Solutions IPO - BusinessLine

aurionPro Solutions: Avoid

Krishnan Thiagarajan

INVESTORS could avoid the book-built public offer of aurionPro Solutions made at a price band of Rs 81-90 per share. Even at a lower end of the price band, the IPO is stiffly priced at a price -earnings multiple of 23 times its FY 05 earnings. The pricing may not leave adequate scope for capital appreciation in the medium term. Since aurionPro is expected to focus primarily on the products market for the banking segment, the flight to scale and intense competition in this space will be the principal challenges to growth. Over the past year, scale, size and reach have emerged as the key variables dictating growth in the banking products segment. The services business of aurionPro is aimed at complementing its product portfolio.

The recent acquisition of the Citigroup's equity stake by Oracle in i-flex solutions has raised the competitive bar and heralds the consolidation phase in the banking products space. Some of the mid /small-sized product players that are focussed on niches and competing with the likes of aurion have broad-based their products portfolio to focus on insurance, mutual funds and even ERP solutions to bring in greater predictability to their revenue stream. Moreover, the longer sales cycle (from the start to the closure of a product deal) and higher selling and marketing expenses, especially in penetrating the developed markets, such as the US, leave smaller - sized players more vulnerable to fluctuations in revenue and earnings stream.

aurionPro is coming out with this public offer to raise Rs 24-27 crores primarily to expand its facilities at a cost of Rs 7.8 crores, establish overseas offices at Rs 3.5 crore and finance an incremental working capital of Rs 4.2 crore. The remaining proceeds after public issue expenses are met will be retained for acquisitions. To part finance the project, the company has made a private placement of shares at Rs 150 per share with certain investors to the tune of Rs 3.14 crore.

On the products side, aurionPro is focussed on developing products in the area of cash management, treasury and risk management space for the domestic and overseas markets. It is also engaged in providing customised IT services and support to its clients in the banking arena. The consolidated revenues as of March 31, 2005 stood at Rs. 10.4 crore, with post-tax earnings of Rs 2.7 crore, with a significant jump in revenues in the latest financial year. It has 190 employees as of August 30, 2005.

Given the small revenue base, the scope for growth will be fairly high over the next year or so. However, considering the relative size of the company and its nascent presence in the developed markets, the ability of aurionPro to scale and establish its presence in these markets will present a serious challenge over the medium term. Besides, aurionPro's relatively niche focus on banking products may also pose a challenge as this market is moving away from the best-of-breed solutions towards an integrated solutions market with established global players. This is poised to increase the scope for vendor consolidation and open up greater opportunities for large product vendors to scale-up within banking clients in a modular fashion. Finally, the competition among niche vendors focussed on key areas such as cash management, treasury and risk management has also been growing in the past few years. This is likely to place pressure on margins in the coming years.

The book-built IPO opened on September 27 and closes on October 4. The stock is to be listed at NSE and BSE. The lead managers to this offer are Centrum Capital and Karvy Investor Services.

Paradyne Infotech - BusinessLine

Paradyne Infotech: Avoid

Suresh Krishnamurthy

AN INVESTMENT in the initial public offer of Paradyne Infotech need not be considered. The company's financial performance the past two years has been impressive. The valuation of the stock is also attractive.

Paradyne's market capitalisation, based on the offer price, works out to Rs 42 crore and the price-earnings multiple would be about 9. However, factors such as the lack of well-articulated strategy, excessive dependence on the domestic market for revenues, and the small size of the company increase the risks involved.

Paradyne does not appear to possess any distinct competitive advantage, which is essential for a software services company to sustain itself and grow.

Impressive growth

Paradyne's revenues increased from Rs 35 crore at the end of March 2003 to Rs 68.52 crore at the end of March 2005.

During the same period, profits rose from Rs 31 lakh to Rs 5 crore. The average return on net worth over the past three years is a healthy 35 per cent.

Annand Sarnaaik, a management graduate with no experience in software services, set up Paradyne Infotech in 1997.

The company is into systems integration, software services, managed services and recently entered BPO. Systems integration contributes a sizeable 75 per cent of the firm's revenues. Exports accounted for less than 10 per cent of total revenues. Growth in export sales has, however, been unimpressive.

The bulk of revenue may be generated from hardware sales. Though the company does not indicate the hardware component in the total sales, of the total 102 technical staff employed by Paradyne, 34 are hardware engineers.

Risky prospects

Nothing in the offer document suggests that Paradyne has a competitive edge over its competitors in the domestic software arena. The revenues from the latter are set to grow rapidly given that the Indian industry is expected to grow at 12 to15 per cent per annum in the next several years.

Without competitive advantage or size, Paradyne may find it difficult to take advantage of the growth prospects for domestic software services. Its management strategy is also not well articulated.

Paradyne sees itself as an integrated IT solutions provider. The company's size, however, makes such claims look lofty and suggests that it lacks a focussed strategy.

The offer document also does not clearly indicate what proportion of the profits is accounted for by systems integration, which is hardware intensive and the competition is quite intense in India.

There is also no mention of the company's performance in the quarter ended June. Paradyne has indicated that it has orders for Rs 12 crore as of end-September. This works out to a substantially small proportion of the total revenues for the year ended March. These risk factors considerably dilute the attractiveness of the offer.

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Sharekhan Report

Emco
Cluster: Apple Green
Recommendation: Buy
Price target: Rs450
Current market price: Rs421

Healthy order book
At the current market price (CMP) of Rs421 Emco trades at 0.9x EV/order book. Going forward, we expect this trend to continue mainly on account of the huge investment lined up in upgrading the existing power infrastructure as well as in setting up new power facilities. We will review our recommendation and estimates at the time of Q2FY2006 results.

Thermax 
Cluster: Emerging Star
Recommendation: Buy
Price target: Under review
Current market price: Rs797

Strong order book
We expect Thermax's earnings to grow at a compounded annual growth rate (CAGR) of 36.8% over FY2005-07, driven by a 20.5% CAGR in the revenues and a modest margin recovery. At the current market price the stock quotes at 1.0x EV/order book. We will review our recommendation and estimates upon receipt of Q2FY2006 results.

Sintex Industries

Cluster: Apple Green
Recommendation: Buy
Price target: Under review
Current market price: Rs690

Raising funds
Sintex Industries, a dominant player in the textiles and plastic businesses, has raised USD50 million (approximately Rs220 crore) through a zero coupon unsecured and un-rated 5-year foreign currency convertible bond (FCCB) issue, with a yield to maturity set at 6.85%..

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Paradyne Infotech - Capitalmarkets

Paradyne Infotech (Paradyne), promoted by technocrat Anand Sarnaaik, caters to the banking, financial services and insurance (BFSI) segment in the domestic market. Its wholly owned US-based subsidiary, Sundune Corporation, was set up to market and support implementation of its products in the US market. Paradyne holds 99.70% of the equity of Intercon Management Services, a management consultant for industrial, commercial and adminisatrative activities.

The objects of the issue include spreading Paradyne's operation in other parts of India from Mumbai, Bangalore, Chennai and Delhi, expanding the software development center in Mumbai, upgrading the core banking product FinWorQs and human resource product HrWorQ at a cost of Rs 5.19 crore, setting up a data and support centre, upgrading the research & development lab and quality certification to international standards, and investing in subsidiary Sundune Corporation in the US. To enhance the functioning of the marketing and support base, the company intends to make an investment of about Rs 3.75 crore.

Strengths

• Paradyne's performance in the last two years has been good, with sales rising from Rs 35.40 crore in FY 2003 to Rs 68.56 crore in FY 2005 and net profit jumping from Rs 30 lakh to Rs 5.11 crore.
• The company has a balanced business mix in terms of client-wise distribution of revenues, with no significant dependence on a single client.
• The current aggregate order booking (as on 1 September 2005) is around Rs. 12 crore, comprising following major customers: 3D PLM Software (Geometric Software), Amdocs, Department of Income Tax, J M Morgan Stanley, Acer India, BMC Software, Zensar Technologies, Mandvi Bank, Mercator Lines, KPIT Cummins, and Rochem Separations.

Weakness:

• More than 70% of Paradyne's revenue comes from system integration, which is a highly competitive and low profit margin area. The rest of the revenue is derived from software services and managed services.
• The company's business is focused on the BFSI vertical in India. This makes future success highly dependent on IT spending of banks, insurance companies and financial institutions and continuance of demand for its products and services from these industries in India. Therefore, any structural changes in the BFSI vertical may materially affect business. Further, BFSI is a highly crowded space with a large number of players, both small and large, providing software services and products. This translates into a high competitive risk for the company. In addition, the major market is India, which is a geographical risk.

• The quarterly revenue may fluctuate significantly from period to period in future as system integration and products constitute a major revenue stream. Further, the product business is highly exposed to technology risk.

Valuation

Consolidated FY 2005 EPS on post-issue equity of Rs 10.80 crore works out to Rs 4.7. The offer price of Rs 42 discounts this 8.9 times. If the company maintains its current growth tempo and succeeds in its new products, one can expect gains.

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AurionPro Solutions IPO analysis

Networth Stock Broking recommends AVOID

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Motilal Oswal recommends Buy On Raymond @ 388 With Target Price 486

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Balmer Lawrie & Company

Cluster: Cannonball
Recommendation: Buy 
Price target: Rs 481
Current market price: Rs 410

Bright prospects
We remain optimistic about the business outlook of Balmer Lawrie and there is no deviation from our earlier stance on the stock. Our investment arguments about the company remain intact and we have factored in all the possible downside in our estimates. The growth rate that we have assumed for each of the company's businesses is in line with the outlook shared by the company's management in the AGM. We reiterate our Buy recommendation on the stock with a price target of Rs481.