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Motilal Oswal - Alok Industries
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Prithvi Information Solutions - IPO
Focus on onsite work
Onsite work in the US contributes 90% of revenue and most of the software professionals are not its employees
Hyderabad-based Prithvi Information Solutions provides IT solutions to various industry verticals including technology, health care, manufacturing, BFSI, telecom, and e-governance, and services like application development, package implementation, re-engineering and maintenance.
The bulk of the customers are based in the US.
Promoted by US-based Ms V Madhavi and India-based V Satish Kumar in 1998, Prithvi Information Solutions has offices in the US, Canada, United Kingdom, and Singapore.
The proceeds of the current IPO will be utilised to set up an offshore delivery centre in Hyderabad at an estimated cost of Rs 91 crore and to meet the working capital requirement of Rs 49 crore and towards issue expenses of Rs 10 crore.
Strengths:
- Prithvi Information Solutions has a balanced business mix, with no significant dependence on any single client. The largest client of the company contributes just 4% of the revenue. The Top 5 and top 10 clients contribute around 16% and 28% of the total revenue .At the end of FY 2005, the company had 55 active clients.
- The top line has risen steadily at a CAGR of around 63% in the last five years, from Rs 26.53 crore in FY 2001 to Rs 305.12 crore in FY 2005. The bottom line has shown a CAGR of 29% to Rs28.85 crore, between FY 2001 to FY 2005.
Weakness:
- Unlike most other Indian IT companies, Prithvi Information Solutions generates around 90% of its revenue from onsite. Though the revenue per capita is higher onsite, so is the expense. As a result, the company's operating profit margin (OPM), at 9.5% in FY 2005, is less than half of the industry composite average of 23.1%
- Peculiarly, the company procures most of its manpower through vendor agreements. Thus, the people working on the company's projects are not its employees. As it does not have any long-term contract with such vendors, any disruption in service can have an adverse effect on the operational and financial performance.
- Currently, the US market contributes 90% of the revenue, which is a geographical risk.
- The company does not have any forward contract or hedging tools to combat the impact of currency fluctuation. Any unfavorable movement in the US dollar will put its financials under pressure as more than 90% of the revenue is billed in the US dollar.
Valuation:
In the last five year between FY 2001 to FY 2005, Prithvi Information Solutions's top line has grown at a decent pace, from Rs 26.53 crore in FY 2001 to Rs 305.12 crore in FY 2005. However, in the same period, the bottom line has not grown in the same pace on higher mix of onsite work in the total revenue, which reflects in OPM as well as the net profit margin (NPM), which have fallen drastically in the last five years. In FY 2001, OPM and NPM were around 30.6% and 30.2%, which came down to 9.5% and 9.4%, respectively, in FY 2005.
The offer price band of Rs 250-270 discounts FY 2005 EPS on post-issue equity by 15.7 to 17 times, which does not leave any scope for appreciation. However, in the quarter ended June 2005, the revenue stood at Rs 98.22 crore and net profit was Rs 10.24 crore, with OPM and NPM of 11% and 10.4%, respectively. The annualised first quarter EPS on post-issue equity works out to Rs 22.7.The offer price band of Rs 250-270 discounts this 11 to 12 times. The company has reversed the falling trend in OPM in the June 2005 quarter, just ahead of the IPO. It is necessary for it to sustain this uptrend, going forward, for continued investor interest in the scrip, post-listing
Monday, October 24, 2005
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