Taksheel Solutions IPO Review by Magnum (Avoid)

Review By Magnum Equity Broking Ltd on September 29, 2011

TAKSHEEL SOLUTION Ltd will enter the capital market on September 29, 2011 with a fresh issue of 55 lakh equity shares of Rs.10 each; in the price band of Rs. 130-150 a share, aiming to raise Rs. 71.5-82.5 crore. The issue, constituting 25% of the company's post issue paid-up capital, closes on October 04.

Objects of the Issue

Capital expenditure for setting up a new software development center at Hyderabad & Warangal
Acquisitions and Other Strategic Initiatives
Financing the incremental working capital requirements
General Corporate Purposes.
To meet Issue expenses.

Incorporated in 1999, Taksheel Solution Ltd. is IT Solution Company engaged in the business of providing products and services to the financial services industry, Information Technology & Telecom. Headquartered in Hyderabad, with an office in North America, they provide professional IT services to global clients.
Company offers Wealth Management Technology Solutions, Telecom Solutions, Business Intelligence Solutions, Data Warehousing, Application Development and Application Maintenance.
Financial Services provided by Taksheel includes wealth management to financial institutions such as Asset and Investment managers, Brokerage houses, Insurance, Hedge funds, Trusts and Family Offices.
In Telecom Solutions, Taksheel offers Enterprise IP telephony Solutions, Carrier Switching & Billing Solutions, Contact Center Solutions, IVRS, SMSC, Voice & Video Conference solutions, Chat platforms, Content Delivery Platforms, Closed Private GSM network (CPMN).
In Information Technology services, Taksheel offers Enterprise Network Implementation (LAN, WAN, MAN), OS migration to open source, Software Development, Application customization, Managed IT services (Desktop, Server, Network, NOC support) Server Implementation & Support (Windows, Unix, Sun, Linux), Data Storage Network (SAN, NAS), Network & Data Security Solutions, Network Monitoring System, NOC support Systems, Data center and Disaster recovery center implementation, CRM solution and more.
They offers cost-effective solutions through its Onsite, Offsite and Offshore development methodology by leveraging its global delivery model and utilizing delivery centers based in Hyderabad, India, and New Jersey, USA. Some of their customers include Merryl Lynch and Bank of America.

Requirement of Funds

Expenditure Items	Total (Rs cr)
Capital expenditure for setting up a new software development center at Hyderabad & Warangal	17.81
Acquisitions and Other Strategic Initiatives	22.00
Financing the incremental working capital requirements	12.80
General Corporate Purposes	(*)
To meet Issue expenses	(*)
Total	52.61

Peer Comparison

Name	FV	EPS (Rs)	RONW (%)	NAV (Rs)	P/E
Aurionpro Solutions Ltd	10	8.9	1.7	150.7	17.4
GSS Infotech	10	9.5	5.4	200.2	17.7
Nucleus Software Exports Ltd	10	14.1	18.2	83.7	5.7
TSL	10	16.51	30.26	55.41	(*)

Risk Concern

Company had negative cash flows in recent fiscals.
Company is subject to risks arising from foreign exchange rate.
Company operates in a highly competitive environment.
Global operations exposure.
Revenues are dependent on clients located in the United States America. Economic slowdowns & other factors that affect the economic health of the United States may affect their business.

Outlook

The IPO has been rated on the basis of revenue concentration risk in terms of geography, verticals and number of clients, growing trend in US market and significantly high level of debtors leading to a negative cash flow from operation in recent past.
However the company is also engaged with the legal activities with RBI from last so many years. But the company carries a high rich experience of promoter in this field.
The company's top line grew at a CAGR of 65.49% in the last five years to Rs 147 Cr in FY11. The company did an EBITDA margin of 19% and a PAT margin of 19% in FY11.
The company's market cap is Rs 327 Cr on an upper price band of Rs 150 which is 2.2 times its FY11 revenues. On fully diluted equity, the EPS stands at Rs.16.5 and on this basis, the issue is priced at a P/E of 7.87 to 9.09 based on lower and upper price band. Considering NAV of Rs. 55.41 as on 31.3.2011, the asking price is at an average of 2.70 P/BV.
The company is a very small player in a rapidly growing IT business and is exposed to international markets. Hence TSL pricing looks cheap against the industry composite, it may not be attractive. Thus it's worth giving a miss.

Risk Concern

Company had negative cash flows in recent fiscals.
Company is subject to risks arising from foreign exchange rate.
Company operates in a highly competitive environment.
Global operations exposure.
Revenues are dependent on clients located in the United States America. Economic slowdowns & other factors that affect the economic health of the United States may affect their business.

Conclusion / Investment Strategy

The company is a very small player in a rapidly growing IT business and is exposed to international markets. Hence TSL pricing looks cheap against the industry composite, it may not be attractive. Thus it's worth giving a miss.

Reviewer recommends Avoid to the issue.