Krishnan Thiagarajan

INVESTORS can refrain from investing in the book-built initial public offering (IPO) of Prithvi Information Solutions.

The price band for this offer is Rs 250 to Rs 270 per share.

The company's onsite business model, focussed on software services for small and medium businesses in the US, may not be a sustainable growth proposition.

Recognising this, Prithvi is coming out with this IPO to build an offshore delivery centre with 1,500-seat capacity in Hyderabad at a cost of Rs 150 crore.

However, the company will find the going tough and it is likely to face scale-up challenges, pricing pressures in moving onsite work offshore or garnering large offshore orders, and intense competition from established multinational and domestic peers.

This offer is priced at an earnings multiple of 11-12 times its annualised 2005-06 per share earnings. The risks in this offer outweigh the potential for attractive returns in the medium term.

Prithvi's revenues have grown at a steady clip touching Rs 305 crore in 2004-05. Its post-tax earnings growth, which was sluggish in the past, began showing signs of improvement in 2004-05 and the first quarter of 2005-06, with the net profit margin in the 9-10 per cent bracket.

However, three factors can affect the company's growth prospects.

One, Prithvi's focus on delivering software services to small and medium businesses in the US (with revenues of less than $100 million) has been a good growth strategy so far.

As of March 31, 2005, incomes from this client segment stood at 68.2 per cent of overall revenues.

But such a strategy can work only up to a point, as these service contracts are largely project-based, without much scale-up potential and come with high execution risks.

Secondly, nearly 90 per cent of the company's revenues accrue from onsite-centric work.

Since Prithvi focuses on small and medium businesses and US government clients, there will be little scope for shifting such work offshore.

Though it is possible for large clients (with revenues of $100 million), accounting for 25 per cent of its revenues, the maturity of the offshore model is leading to significant vendor consolidation.

This movement by clients from multiple vendors to a limited set of two or three vendors can affect the revenue pipeline of players such as Prithvi.

Thirdly, since time and material contracts represent close to 90 per cent of revenues, moving work offshore will involve a sizeable dip in revenue realisations in the coming quarters.

Though this may help improve the gross and operating margins, the revenue transition phase can be quite painful, as a few mid-sized Indian companies will testify.

In the absence of niche focus, in terms of verticals and service offerings, companies such as Prithvi run the risk of getting marginalised in the medium term. In view of all this, investors could avoid this IPO.

The issue opens on October 25 and closes on October 28. The lead manager is Anand Rathi Securities and Karvy Investor Services.

(This article was published in the Business Line print edition dated October 23, 2005)
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