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Monday, January 17, 2000



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Melstar Information Technologies: Not the right solution

Krishnan Thiagarajan

BL research Bureau

MELSTAR Information Technologies (Melstar) is making an initial public offering of equity to part-finance the setting up of a new software development centre at Melstar House and SEEPZ in Mumbai, make an investment in Melstar, UK, and its subsidiary in t he US. It also proposes to upgrade its existing infrastructure at other development centres and pre-pay the term loans of Rs. 1.95 crores to Punjab National Bank by utilising the proceeds of this offer. The total cost of the project is estimated at Rs. 1 6.46 crores. This IPO is accompanied by an offer for sale by the existing shareholders, led by Usha Martin Ventures at an offer price of Rs. 72 per share, aggregating Rs. 6.40 crores.

Between 1994 and 1998, the company had a fairly diversified business profile ranging from software exports to making and selling electronic products such as calculators, blinkers, and so on. Melstar decided, in early 1998, to suspend its electronics faci lity and reduce its focus on the hardware business. According to the offer document, it chalked out a three-pronged strategy to enhance its presence in the software development business:

A For strengthening its software development activities in India, Melstar has set up two dedicated software development centres - one for Informix Software Pvt. Ltd., a subsidiary of Informix Inc., US at SEEPZ, Mumbai, and another for IBM Global Se rvices Pvt. Ltd. at Bangalore. The total contract with Informix envisages exports of over Rs. 27 crores in five years, beginning 1998-99, and the IBM contract has earmarked exports of Rs. 10 crores for three years, beginning August 1998. It also has an enterprise solutions division which has a partnership with IBM and concentrates on projects in IT, banking and manufacturing segments.

A Melstar's subsidiary in the US - Melstar Inc. - has been in the software development business since December 1993. Melstar Inc. also has a separate joint venture with Summit Group, US and ITC Consulting GmbH, Switzerland, christened Global Systems Development Inc. This joint venture specialises in executing outsourcing contracts in the field of banking and has now bagged a major contract from Citibank, US. Melstar Inc., which holds a 45 per cent stake in Global Systems Development Inc., proposes to transfer this equity stake to Melstar Information Technologies.

A Melstar has also established a branch office in London, called Melstar, UK since May 1998, which caters to the businesses in the UK and other places in Europe. Through this offer, it proposes to incorporate a new company in UK as a wholly-owned subsidi ary of Melstar Inc. or as a joint venture to takeover and conduct business of its branch office. Melstar has also entered into a partnership agreement with Linkhand Image, UK, Singularity Ltd. Ireland, valid for 43 months ending March 31, 2002 for the de velopment and sale of a document management systems in component form. Besides, a 20 per cent ownership share in the agreement, Melstar also envisages development revenues during the course of development of this product.

As part of the expansion plan, Melstar plans to set up a software development centre at its existing location at Andheri and SEEPZ, Mumbai. The prime focus areas of the Melstar Andheri centre will be on object-oriented technologies and e-commerce. For th e latter, a dedicated centre has already been set up by Melstar in July 1999. Both e-commerce and object-oriented technologies are high-growth areas with enormous potential, but as a relatively inexperienced player, the company may find the going tough i n a competitive environment.

Several key frontline players such as Infosys, Satyam, Mastek and Wipro in the Indian software arena are aggressively focussed on these high growth areas. Since higher operating profit margins hinge upon these segments, cut-throat competition in these ma rkets is slated to develop in the near term. Although strategic alliances and joint ventures may be a good route to follow, the quality of these ventures will hold the key to future growth and profitability.

Melstar's financial performance in the past does not inspire much confidence. For the year ended March 31, 1999, the combined turnover from both software and other trading/manufacturing activities was Rs. 32.74 crores. Even though software sales accounte d for Rs. 23.20 crores of total revenues, Rs. 10.45 crores was derived from trading in software. The post-tax earnings worked out to only Rs. 0.51 crore. Although the contribution of software sales stood enhanced to Rs. 9.05 crores, out of the total reve nues of Rs. 13.78 crores with post-tax earnings of Rs. 2.05 crores, the past performance fails to fully justify future potential.

In the absence of the requisite track record in timely execution of complex software development projects, the future remains uncertain at this point in time. Notwithstanding the healthy order book position and growth potential, this IPO, priced at Rs. 7 2, may offer only moderate scope for capital appreciation.

Industry Class : Computer - Software

Issue Type : Equity

Offer price : Rs. 72 per share

Offer Size : Rs. 16.28 crores

Application amount : Rs. 7200

Post issue equity : Rs. 12.15 crores

Project Cost : Rs. 16.46 crores

Debt: Equity : -

Offer Opens on : January 17

Offer Closes on :January 22

Promoters : Suresh Bansal/S. M. Arora

Lead Managers : ICICI Securities and Finance

Listing at : BSE/NSE

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