The IPO of Chennai based Latent View Analytics (LVA), a data and analytics company, opens for subscription on November 10. The total issue of ₹600 crore, consists of a fresh issue of ₹474 crore and offer for sale of ₹126 crore by existing shareholders. While company’s cash position is comfortable even before the IPO and business is asset light, it intends to shore up its balances to fund inorganic growth initiatives, meet working capital requirements/increase capital base of its subsidiaries in international geographies to tap growth opportunities. The IPO price values the company at a post issue market cap of around ₹3,900 crore.

Business

If ‘data is the new oil’, then it would also be fair to say that data analytics is the new refinery that converts the raw products into useful downstream derivatives. As a data and analytics company, LVA aims to help organizations interpret data accumulated from sources such as business operations, social interactions and sensors by using the power of big data through business analytics and data insights. Through its services the company aims to enable companies to increase revenue generation opportunities, improve efficiency, reduce costs and increase competitiveness. Thus, the company offers a pure play opportunity on a fast growing segment within the export oriented broader Indian IT services space – digital segment and within that specifically the analytics space.

 

 

As per report by management consulting firm Zinnov, the global market for data analytics was US$ 174 billion in 2020 and is expected to grow at a CAGR of 18 per cent to US$ 333 billion by 2024. This provides a huge growth opportunity for India-based analytics companies (pure play and broader IT services companies) to tap. Availability of talent and offshore cost advantages provide scope to outgrow the industry growth rate. The spectrum of opportunity exists across geographies, industries, and across functions within industries – finance, marketing, operations, HR etc.

LVA founded in 2006, was an early mover in this space and has gradually established its presence although it has had to compete against well-established IT services giants. The company has also adopted a prudent approach since inception by building a bootstrapped business. Amongst pure play analytics companies in India, LVA is amongst the leading ones.

The company’s business segments are split into 4 main segments – Consulting Services, Data Engineering, Business Analytics, and Digital solutions.It has partnered with companies across few industries and functions and enabled partners to increase revenue, save costs, improve customer experience etc. For example, amongst many successful projects, one is case where the company enabled a leading US based cosmetics company that was facing declining brand image, to improve its product innovation cycle, by building a social insights platform from mining and appropriately interpreting troves of data in social media. Currently, LVA is focussed on four sectors – Technology (63 per cent of FY21 revenue), CPG and Retail (10 per cent), Industrials (17 per cent), and BFSI (10 per cent). North America drives its business accounting for 93 per cent of revenue. It plans to use part of the IPO proceeds to invest and grow business in other geographies. The company has judicious onshore/offshore mix with 87 per cent of employees located offshore in India, providing scope for operating leverage.

Financials and valuation

LVA reported operating revenue of ₹306 crore and PAT of ₹91.5 crore in FY21. It delivered 2 years revenue and PAT CAGR of 3 and 23 per cent respectively.While revenue growth is modest, it is partially due to Covid disruption. The other reason according to management is that in recent years business focus has been re-oriented to focus on higher end analytics business and de-emphasising on businesses that were of higher volume but lower value add to clients. This is reflected in margins moving up steadily from 20.7 in FY19 to 29.90 per cent in FY21(to be noted that FY21 margins also incrementally benefitted from lower travel/marketing and employee spends due to covid). LVA has seen better revenue traction in recent June quarter with revenue growing by around 20 per cent Y-o-Y (including benefit of base effect). PAT was flat as some cost benefits that accrued in FY21 reverted(PAT margin at 25.4 per cent). The company has good cash conversion with net cash from operating activities at close to 100 per cent of PAT in FY21. Balance sheet is also strong with net cash at around 10 per cent of pre-IPO market cap(3,422 crore).

The IPO price of ₹197 per share implies a pre-IPO, PE valuation of around 37 times. While this is a premium to established tier 1 IT services companies, part of it is built on the premise that LVA is a pure play analytics company versus established players having a mix of legacy and digital business. For the established players high end analytics is a subset within their high growth digital business. LVA’s adjusted EBITDA margins was at around 34 per cent (FY21) versus at around 28 per cent for Tier 1 IT services companies like Infosys and TCS. Having said that it needs to be noted that the while valuations appear justified on a relative basis, it appears reasonably priced on an absolute basis given inherent risks for smaller players in the industry till they gain significant scale.

Few other risks to factor are that this is a highly employee driven business and long term investors need to track metrics like employee churn rate, wage hikes as these will have a good impact on margin trends. Employee costs as a percentage of operating revenue hovered between 58 to 64 per cent during FY19-21. Another risk to factor is the high client concentration – its top 5 clients have consistently accounted for around 55 per cent of total revenues in the last 3 years, although this is not unusual for smaller players in the industry.

As LVA scales up, its success may very well depend on how it uses its own analytics skillsets across the different functions and strategy of its own business.

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