https://bravostocks.wordpress.com/2015/10/11/quick-heal-ipo-worth-installing-or-removing/
Quick Heal IPO – Worth installing or removing?
Quick Heal recently filed a DRHP. I was curious that why did not they launch an IPO in the US, especially when the investor base in the US is more exposed to tech stocks. I checked Google for any articles about Quick Heal’s potential valuation and found a year old statement by the founder.
“Around Rs.3,000 crore is what I’m expecting,†managing director and chief executive Kailash Katkar said in an interview.
In the same article, there was another opinion statement from investment banks.
“Earlier estimates from experts and investment bankers had pegged the potential valuation at about Rs.1,200 crore.â€
So I am not sure what the valuation would be. My point here is to check financials and fundamentals, and then just assess this wide range of valuation on fundamentals.
Here are the revenue numbers of Quick Heal. As you might have noticed that revenue growth has decelerated from 2013 and is mid-teens for FY 2015.
Revenue from operations 2015 2014 2013 2012 2011
All figures in Rs mn
Sale of manufactured products 25.89 20.01 2.98 – 1,435.28
Sale of traded goods 2,812.14 2,418.58 2,045.05 1,789.85 –
Sale of services 2.64 0.46 0.89 0.8 1.03
Revenue from Operation (gross) 2,840.67 2,439.05 2,048.92 1,790.65 1,436.31
Less – excise duty – 0.01 0.08 0.88 129.04
Revenue from Operation (net) 2,840.67 2,439.04 2,048.84 1,789.77 1,307.27
% growth 16.5% 19.0% 14.5% 36.9%
Other income 81.83 98.45 97.5 56.8 23.85
% growth -16.9% 1.0% 71.7% 138.2%
Total revenue 2,922.50 2,537.49 2,146.34 1,846.57 1,331.12
% growth 15.2% 18.2% 16.2% 38.7%
On the other hand, Quick Heal’s marketing and sales expenses have been rising at more than twice of revenue growth. Quick Heal clearly has to spend more on marketing to sell more solution, as marketing expenses as % of revenues has increased by 500 bps in last two years.
Marketing and sales expenses (in Rs mn) 2015 2014 2013
Marketing & advertising expenses 288.09 223.1 190.28
Business promotion expenses 134.53 109.7 70.48
Sales incentive 223.67 145.84 103.85
Total marketing expenses 646.29 478.64 364.61
as % of revenues 22.1% 18.9% 17.0%
% growth 35.0% 31.3%
Net profit margin has also decreased significantly from 36.1% in 2013 to 19.1% in 2015, largely becaof significant increase in employee benefit and operational expenses.
I hope these marketing dollars must be working for Quick Heal. However, the industry has changed significantly since Quick Heal started. The rise of freemium category has changed the entire landscape of antivirus industry. Moreover, popular OS, Windows and Mac, have started shipping pre-built antivirus within their OS. I really do not remember the time when I had to install an antivirus on my machine and neither do my friends and family members. So the question is who pays for these antiviruses? Two categories – 1) Gullible customers and 2) Small and medium size businesses.
If you do a Google search on install third-party antivirus then top results are about “How to uninstall third-party antivirus?†or “Why Microsoft Defender is better than third-party antivirus?â€. Within freemium as well as in paid category Quick Heal does not show up in top category. You can check organic traffic to Quick Heal as well as to others from SemRush screens.
Screen Shot 2015-10-10 at 7.00.36 PM Screen Shot 2015-10-10 at 6.57.24 PM Screen Shot 2015-10-10 at 6.56.39 PM Screen Shot 2015-10-10 at 6.55.29 PM
Quick Heal’s organic search traffic is a tiny fraction of other major antivirus providers. AVG (freemium) clearly has dominance across the globe including India (orange slice). In paid category, Kaspersky is the clear leader with 115x more traffic than Quick Heal. If you do a Google search on “best free antivirusâ€, “free antivirus†or just “antivirusâ€, Quick Heal is hard to find on the first page. First page is usually filled with articles from top tech magazines reviewing top ten antivirus and Quick Heal does not show in any of those lists. I usually prefer comparisons from AV-Comparatives and Quick Heal is not the top antivirus, according to their latest survey. Source: http://bit.ly/1GzwD9K
Screen Shot 2015-10-10 at 7.34.33 PM
Now that is all desktop, how about mobile? After all, mobile is increasing much faster than desktop. Quick Heal’s performance in mobile category is much worse than desktop. Here are the results from protection and usability point of view. Quick Heal is a distant 19 in protection category and 18 in usability.
Source: https://www.av-test.org/en/antivirus/mobile-devices/
If you do a search on Google Play store then also you will have to scroll beyond 7-8 pages to see Quick Heal. In terms of install count, Quick Heal has 5-10 million installs while similar top apps have 100-500 million installs. So based on Google search, I could not find a single reason to install Quick Heal on my desktop or mobile device.
Now, to the question whether Quick Heal’s IPO is worth installing? I do not see any moat or competitive advantage for the company but I would still like to see the valuation. If management’s or investment banks’ estimates are considered then Quick Heal’s valuation would look like this (data is for FY 2015).
Estimate Mgmt. ibank
Equity valuation 30,000 12,000
Enterprise value 28,630 10,630
EV to FCF 398.25 147.87
EV/EBITDA 27.94 10.37
EV/EBIT 34.79 12.92
Price/Earnings 53.29 21.32
Now compare this with Just Dial, who shares SMB customer segment with Quick Heal and also relies on a subscription model, Just Dial have been growing revenues at three-year CAGR of 31% while Quick Heal has grown by 26%. In terms of EBIT, Just Dial has grown at 40.1% while Quick Heal has declined by 9%. Moreover, Quick Heal’s FCF conversion is also way smaller compared to Just Dial.
Just Dial is trading at a PE of 47x, EV/EBIT of 41x, EV/EBITDA of 29x, and EV/FCF of 43x based on FY 2015 financials. So management estimate is way out of range when compared to Just Dial’s valuation. Now, what should be the right multiple here? Well Quick Heal is largely a desktop company and an EPS multiple on the consumer desktop in a global scenario could range from ~8x to something more like the low-double digit multiples PC-facing companies have generally received of late. On the other hand, IT hardware companies with more than Rs1,000 crore market capitalization in India have a PE of 25x. Quick Heal’s peer group in the US is trading at 23x. However, Quick Heal’s global peers have a diversified source of revenues and in some cases solid network effect compared to Quick Heal. I believe investment banks estimate is more reasonable compared to Quick Heal’s management.
If somehow Quick Heal can still sell you this IPO for 54x PE then I am sure the management and Sequoia Capital can say it out proud – “Sold to you, Sucka!â€.
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Zerodha (Trading Account)
RHP
