Thinksoft Global Services Limited (TGS) is in the business of software testing and is focussed on the Banking, Financial Services and Insurance sector (BFSI). The company has more than ten plus years of experience in the financial domain for testing. The company has a global presence with branch offices or place of business in New York, London, Frankfurt, Singapore, Hong Kong, Brussels, Sydney, Bangalore and Chennai.

The revenue is spread geographically with roughly 53% coming from Europe, 25% from the Middle East and about 12.6% coming from USA. This is a people dominated or people centric business and to this extent people retention is a key to success. The company has 523 employees as on 10th August 2009 with 53% of them being engineers, 18% being science graduates and 15% being arts and commerce graduates.

The focus of the company is on the SME segment (small and medium enterprise). Currently the company has almost 63% of its revenues coming from onsite activities and this is likely to reduce to about 55% going forward. TGS is looking for growth through acquisition and would be interested in acquiring companies in different geographies to further its reach.

The company is in existence for 11 years and the revenues for 2008-2009 were Rs 95.7 crs. Considering that TGS was a first mover in a niche segment the size of turnover seems relatively small and therefore makes the company vulnerable going forward. Further revenue is fairly concentrated with the top ten clients accounting for almost 93% of its revenues. ICRA has graded the company TGS as grade 2 out of 5 indicating below average fundamentals on account of relatively modest size. ICRA also believes that modest size limits economies of scale and managing attrition and large orders is challenging. 

Objects of Issue

TGS is raising money for setting up a new testing centre, to meet issue expenses and to get the shares listed on The BSE and NSE stock exchanges. The company would raise between Rs 43.75 crs to Rs 47.4 crs from this offering of which roughly 2/3rd or 63% would go to the selling shareholders. In fact the gross amount that the company would raise as fresh equity would be a mere Rs 16.20 to 17.55 crs. The cost of setting up this centre would be approximately 16.10 crs. It means that the cost of raising capital and issue expenses would be an out of pocket expense for the company if the issue is priced anything below the top end of the price band.

Exit of PE investor

The PE investor M/s Euro Indo Investments has invested in two tranches in June 2000 by acquiring 25000 shares at a consideration of Rs 712.50 per share and in March 2001, 29500 shares at a consideration of Rs 1100 per share. The total investment was therefore Rs 3.42 crs. TGS then made a huge bonus issue of forty shares for every share held in July 2001. The next bonus issue was made last year in September 2008 in the ratio of one share for every nine shares held. Including the last bonus the investment made in 54,500 shares has now increased to 24,82,778 shares and the average cost of these shares is a mere Rs 13.78 per share. The PE investor is exiting literally lot stock and barrel from the company except for the last bonus issue of 248,278 shares as there is a lock in of one year on such holding. The PE investor is exiting and the entire issue is only being brought to give him an exit.

The balance sheet of the company as on 31st march 2009 shows that there is cash and bank balances of Rs 21.12 crs against a total requirement of Rs 16.1 crs for the new centre to be built. This centre is expected to be ready only in March 2011 and the use of this facility would be over the next few years. Very clearly no logical explanation for raising equity by TGS at this point is available.

Valuation

The company made a profit before tax of Rs 16.06 crs for the year ended March 2009. This included a currency gain of about Rs 3.36 crs which is about 21% of the total profit before tax. The profit after tax was Rs 14.49 crs and the EPS on a consolidated basis based on pre-issue capital based on March 09 numbers was Rs 16.65. The same on a post issue basis comes to Rs 14.41 per share. Based on these numbers the price band of Rs 120-130 values the company at a price multiple of between 7.2 and 7.8 times based on the pre-ipo share capital. The post-ipo share capital would change these numbers to a price multiple of between 8.33 and 9.02 times

The company is likely to have a flattish year this year because the currency gain which they got last year is unlikely to recur this time and the growth in business may not be enough to offset this one time 21% gain last year. The new centre is a good 18 months away and is likely to happen only in March 2011. 

Conclusion

Niche player but growth and incremental new business are becoming tougher. Only purpose of IPO is to allow exit of PE investor at cost of new entrant/investor. With no immediate upside it makes better sense to simply avoid the issue and allow the secondary market to take a call on the proper price discovery.