The Hindu Business Line : Accel Frontline: Avoid

Given the heightened competition levels in the software space, stiff pricing of this offer, and better investment opportunities among mid-cap stocks, investors may avoid this offer from a risk-return perspective.

Investors can refrain from subscribing to the book-built initial public offering of Accel Frontline (Accel). The price band has been fixed at Rs 75-90 per share.

At the upper end of the price band, the price earnings multiple works out to 16 times its 2005-06 consolidated per share earnings on a non-diluted basis.

Accel currently operates four key segments: IT infrastructure solutions, IT infrastructure management services, enterprise software solutions and business process outsourcing.

The first two segments contribute nearly 85 per cent of its total revenues, with IT infrastructure solutions accounting for a significant 55 per cent.

Object of offer

To strengthen its marketing and sales infrastructure and enhance the contribution from enterprise solutions and the BPO business, Accel proposes to utilise a chunk of the offer proceeds of Rs 50 crore for this purpose.

To achieve this objective, the offer document states that it plans to spend up to Rs 25 crore in the next 18 months for acquisition of companies in the enterprise software solutions or BPO space. It has indicated that it has short-listed a Mumbai-based BPO company and Chennai-based software services company as potential acquisition targets, but no definitive agreements have been reached so far.

It also plans to leverage its strategic alliance with Singapore-based Frontline Technologies Corporation, its key promoter, to expand in the Far-East region.

Accel's IT infrastructure solutions group offers solutions by partnering with leading technology companies such as Sun, IBM and HP.

Using these partnerships, the company is providing solutions in the area of data centres, storage management and disaster recovery. The demand from this segment is poised to grow sharply in the coming years.

Risks

Being a relatively small player, its dependence on a few key relationships is likely to expose it to high client concentration risks.

Two, as the competition in this segment is intensifying, players such as Accel are expected to face greater pressure on their operating margins.

Accel's financial performance in 2005-06 has been encouraging, with revenues growing by 25 per cent to Rs 170.4 crore, operating profit margins at 12 per cent and post tax earnings more than doubling to Rs 9.7 crore.

However, the company's financial performance in the earlier years reflect a fluctuating trend, with flat-to-declining revenues, operating margins locked between 8-9 per cent and net losses in 2003-04.

The offer opened on September 28 and closes on October 5. The lead manager is SBI Caps.

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