The Hindu Business Line : FCS Software Solutions: Avoid

INVESTORS can avoid the initial public offering being made by FCS Software Solutions at Rs 50 per share. Since the overall software services business is booming, FCS Software's focus on application maintenance, e-learning and product engineering services will continue to offer opportunities for revenue growth. However, being a small player in a sector where even the medium sized players are finding the going tough, represents a significant risk.

In the absence of niche focus and committed revenue streams, vendor consolidation, scale-up difficultiesand pricing pressure at the lower end of the software value chain will be the key challenges.

FCS Software is makingthis IPO to finance the creation of IT infrastructure to house 300 new developers and meet working capital requirements. Of the project cost of Rs 19.9 crore, Rs 17.5 crore is to be met through this offer. Of the total revenues of Rs 85 crore for 2004-05, IT consulting has been the key contributor with 55 per cent, and e-learning and product engineering, the other two segments, chipping in with 25 per cent and 20 per cent respectively.

The operating margin at 13.5 per cent appears to be in line with that clocked by other small-sized companies. But sustaining and enhancing these margins in the face of stiff competition, pricing pressures in the application maintenance business and vendor consolidation, especially among the Fortune 500 companies, will be a key challenge. If one adds the yearly wage hikes ranging from 13-15 per cent and industry-wide attrition, the risks associated with being a small player are quite high.

To top it all, the lower end of the application management business, accounting for over 50 per cent of the company's revenues, is getting commoditised. Since the frontline software companies are focussed on achieving significant productivity improvements in application maintenance work through automation and offshoring, smaller firms will remain exposed to the risk of getting marginalised in the medium term. Though e-learning and product engineering will be relatively high growth areas in the coming years, intense competition from large and medium-sized companies and the lack of long-term contracts can result in margin pressures in the near term.

In this backdrop, though the price-earnings multiple works out to 7.5 times its 2004-05 per share earnings on an expanded equity base, the risks outweigh the scope for attractive returns in the medium term. Investors can give this offer a go by.

The minimum lot for application is 100 equity shares. The offer price of Rs 50 is payable in two instalments, of Rs 25 each on application and allotment. The issue opens on August 22 and closes on 26. The lead manager is Allianz Securities.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page