Krishnan Thiagarajan

INVESTMENTS can be considered in the initial public offering (IPO) of Saksoft as the offer price of Rs 30 is attractive for retail investors. At this price, the stock trades at a price-earnings multiple of five times the annualised per share earnings for 2004-05. While the pricing is attractive, the stock is suitable only for investors with a high-risk appetite as there are several risks attached to investing in small companies such as Saksoft.

Strengths

Some of the strengths are:

Good client base: The company enjoys a good roster of clients, with the top five accounting for 78 per cent of the revenues in the first six months of 2004-05. According to the revenue break-up available, its top client Citibank accounted for 37 per cent of Saksoft's revenues, while the next two Bank Mandiri Indonesia and True Link 13 per cent and 12 per cent respectively. The other clients are Morgan Stanley, Standard Chartered Bank and DBS Bank.

BFSI focus: As a relatively small software services company, Saksoft is focussed on the Banking, Financial Service and Insurance (BFSI) vertical. Since BFSI enjoys the highest global IT spend among verticals, the company may be in a position to capitalise on the momentum for offshoring.

Niche offerings: The company's focus on niche service offerings such as testing and business intelligence will help business growth. In these areas, clients generally look for multiple vendors, offering some advantage to small and nimble players.

Risks and challenges

Fluctuating performance: For the first six months of 2004-05, Saksoft turned in a robust performance, with consolidated revenues of Rs 15.7 crore and post-tax earnings of Rs 3.06 crore. In comparison, however, the year 2003-04 was disappointing. While the consolidated revenues stood at Rs 21.5 crore, a mere 6 per cent rise, the post-tax earnings dropped to Rs 1.82 crore, from Rs 5.38 crore the previous year.

The company has attributed the slowdown in revenues to Citibank Singapore moving part of its IT work to its Indian operations set up that year. Anticipating a 35-40 per cent growth in revenues, Saksoft clocked a 25 per cent rise in software development expenses. This also resulted in a sharp drop in the operating profit margins. As a small company, Saksoft remains exposed to this key risk element.

Scale and competition: The company suffers from a significant scale disadvantage compared to even its mid-sized peers. It is operating with an employee strength of 235, to be increased to 480 people in 2005-06. This effectively means that Saksoft's ability to manage execution of projects of higher scale remains untested.

At the same time, the competition from mid-sized peers, such as Hexaware or Polaris, that Saksoft is likely to face will be fairly intense, though it will be competing for order sizes below $1 million.

Preferred vendors : From the company's client list, it is clear that it will face the risk of one or more shifting from multiple vendors (which include Saksoft) to a set of two to three.

If that happens, smaller companies such as Saksoft may get affected. Similarly, if any of these clients is confronted with the need for cost-reduction, a billing rate squeeze cannot be ruled out. Again, smaller companies will be hit harder.

Acquisition risks: As a part of this offer, Saksoft has allocated Rs 5 crore towards acquisitions. The risks associated with picking the right target company and integrating the acquisition are quite high.

Background

Saksoft is making an IPO of Rs 7.5 crore to part-finance expansion of its facilities at Noida/Chennai and for acquisitions. The project cost is estimated at Rs 14.62 crore.

The IPO opened on March 30 and closes on April 7.

(This article was published in the Business Line print edition dated April 3, 2005)
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