The Hindu Business Line : Powersoft Global Solutions: Avoid

This is a stiff price relative to other small-size offers over the past year and the associated risks may outweigh the scope for attractive returns over the medium term.

Disadvantage of size

As the software business is getting mature, small-size companies are likely to face a significant scale disadvantage. Since the application development/maintenance business is already heavily penetrated, competition in this space is intensifying. With growth prospects slowing at the lower end of this segment, some of the mid-size players have been forced to realign their business models.

Focus on RFID

Apart from software solutions, Powersoft plans to focus on the nascent RFID (Radio Frequency Identification) space for a part of its revenues. With initiatives taken by large corporations in the US such as Wal-Mart and the Department of Defence, this space promises to grow into a $600-750 million opportunity by 2008. Powersoft's RFID solutions include RFID implementation, data management and systems monitoring and maintenance.

In the absence of financial break-up, the quality of research in the RFID space and the nature of the projects handled, the company's ability to generate healthy revenues and margins from such projects remain untested. The competition is likely to be fairly stiff as global majors and domestic software companies have been eyeing opportunities in this space.

Marketing tie-up

For marketing and sales, the company has entered into a master services agreement with Nirvann Corporation, US, a venture promoted by Powersoft promoters.

According to the offer document, the agreement was amended recently, whereby Nirvann will pass on all its business and orders to Powersoft for execution.

Despite this amendment, this working relationship can create conflicts of interest at a later date. Of the project cost of Rs 11.88 crore, Powersoft plans to independently invest Rs 2.51 crore towards setting up dedicated marketing offices in the US and Europe.

The project cost has also allocated Rs 3 crore for strategic acquisition. About Rs 30 lakh of this is to be used towards payment of consideration for the acquisition of CADGIS Consultants, a venture focussed on GIS and CAD conversion. Of a total consideration of Rs 96 lakh, Rs 30 lakh is payable in cash and the balance in the form of equity.

For the year-ended March 31, 2004, this venture reported revenues of Rs 20.8 lakh and post-tax earnings of Rs 2.03 lakh. Clearly, this has not added significantly to the revenues of Powersoft. And scaling up the acquisition from this level will remain a challenge for Powersoft.

Offer details: Powersoft is already listed on Bangalore, Madras and Ahmedabad Stock Exchanges and the latest offer will be listed at the BSE. The offer opened on March 23 and closes on 29. The lead manager is Keynote Corporate.

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