The Hindu Business Line : Compulink: Avoid

INVESTORS can refrain from subscribing to the public offer of Compulink Systems. At Rs 60, the price-earnings multiple works out to 11 times its FY-05 earnings on the existing equity base and 17 times on the fully diluted equity. As a products-cum-services company, the pricing may not be considered stiff. However, the risks involved in the offer outweigh the potential for capital appreciation.

Compulink Systems is focussed on providing IP (intellectual property)-based solutions in the "Services Execution Management" space. Its products offer critical information that help service companies manage projects, processes and interaction between teams. The risks in investing in a products company such as Compulink stem from three key elements. One, on account of a longer sales cycle involved , revenues from such companies are lumpy by nature and difficult to predict.

Two, for relatively small companies, building up the marketing infrastructure to achieve scale and penetrate the developed markets will remain a significant challenge.

Besides, incurring high selling and marketing expenses in the initial years can leave them vulnerable to fluctuations in earnings performance.

Compulink is a relatively small products-cum-services company, clocking revenues of Rs 12.85 crore and post-tax earnings of Rs 3.61 crore in 2004-05.

Nearly 62 per cent of the revenues accrued from products, largely in the domestic market. However, in the first half of 2005-06, it incurred a net loss of Rs 0.64 crore on revenues of Rs 5.37 crore on account of investment in people, product development and marketing expenses.

Three, the company is likely to face intense competition from a slew of mid-size players in different fields such as business intelligence or business process management. Large enterprise vendors are also building functionality of the kind provided by Compulink in their newer line of offerings.

In the light of these factors, investors will be better off tracking the performance over a longer time-frame before considering an exposure in the stock.

Facts from the offer document: Compulink proposes to raise Rs 27.23 crore from this public offer. The proceeds from the offer are to be used mainly for product development, international marketing and repayment of term loans. This offer opened on November 25 and closes on 30.

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