iQ INFOTECH: No Queuing for This One

Fact Sheet

iQ Infotech
Sri Paduka, No140
RMV 2nd Stage, I Block
Bangalore 560094
Tel: 080 3416964
Fax: 080 3410645
Proposed Listing (Stock Exchanges): Bombay Stock Exchange and Bangalore Stock Exchange
Public Issue (No of shares): 2,700,000
Face Value: Rs 10 per share
Issue Price: Rs 16 
(Premium of Rs 6 per share)
Issue Opens: February 5, 20000
Issue Closes: February 12, 2000

The information technology sector is once again in the limelight as stock
markets revive and doubts that were raised on the competitiveness of Indian
software companies are forgotten for a while on the basis of some excellent
results from top rung companies. Indian companies have spent millions in setting
up infrastructure to provide offshore development services to their global
clients. However, the potential slowdown in technology spends by US companies
had led to sharp declines in the valuations of software stocks in the last one
month. Although the large and medium-sized software companies will be in a
position to meet the challenges of any slowdown by increasing their share in the
outsourcing market, the smaller ones will find it difficult to compete in terms
of pricing and providing large scale services. It remains to be seen how many of
the small companies are able to meet the challenge of raising the resources
necessary for entering the big league in a short period without compromising on
quality.

Among such companies is Bangalore-based iQ Infotech, which is testing the
wild waters of the primary market with an issue of 27 lakh equity shares at a
premium of Rs 6 per share.

An old player

iQ Infotech was incorporated in 1985 as Systems Dimensions Pvt Ltd and was
converted into a public limited company only in 2000. The name was subsequently
changed to iQ Infotech in mid-2000. The Bangalore-based company, promoted by
experienced and qualified professionals, currently offers services in the areas
of software development, IT-enabled services, e-commerce and other Web-related
services.

The company has been promoted by KR Srinivasan, who has over 35 years of
experience in electronics and IT-related areas in India and abroad. Srinivasan
has won a number of awards in the electronics industry. Other promoters include
Subramanian Ganesan, a PhD from Indian Institute of Science, Bangalore and
currently a professor at the department of computer science and engineering in
Oakland University, US, and Yagnarayana, a professor at the computer science and
engineering department, IIT, Chennai.

The financial performance of the company has been abysmal since its
formation. The company has been providing services in both software and hardware
and the revenues have increased from Rs 1.23 crore in the year ended March 1996
to Rs 1.94 in the year ended March 2000. The net profit of the company has
snailed from Rs 0.38 lakh to Rs 14 lakh in the same period.

iQ Infotech’s operations have been focused on IT-enabled services, embedded
software and hardware. The company, through its hardware division, has been
working in the area of embedded software system design for weapon systems of
Indian defense services. Some of these systems are proposed to be used by Navy
and Air Force services of the Indian government. The company has received a
number of awards and recognition from the government of India. Under the
IT-enabled services, the company is engaged in providing networking solutions,
Web site development, maintenance and providing solutions to Internet companies,
albeit in a small way. The company currently has 45 software and technical
professionals working at its software development center in Bangalore spread
across 8,000 Sq ft.

Expansion plans

iQ Infotech has a Rs 13.5-crore expansion plan for which it is tapping the
capital market to raise Rs 12 crore. The balance Rs 1.5 crore will be met
through term loans from banks. iQ Infotech plans to offer 55 lakh equity shares
of Rs 10 each at a premium of Rs 6 per share. Out of the offer, 28 lakh equity
shares have been reserved for FIIs, banks and mutual funds, whereas the balance
of 27 lakh equity shares will be offered to the public. The promoters propose to
bring in Rs 3.2 crore by subscribing to 20 lakh equity shares at the same price.
Post-issue equity would jump from Rs 3.05 crore to Rs 10.63 crore with the
promoters holding 48% and the balance 52% held by the FIIs and mutual funds and
the public. The shares are proposed to be listed at Bombay Stock Exchange and
Bangalore Stock Exchange.

Financials

(All figures in Rs Crore)

 

1999

2000

2001*

2002*

2003*

Revenues

1.23

1.94

7.5

15

15

Other Income

0.24

0.07

0.05

0.1

0.1

Operating Expenses

1.46

1.78

4.45

8.75

8.74

Operating Profit

0.01

0.23

3.1

6.35

6.36

OPM (%)

8.25

40.67

41.67

41.73

Net Profit

0.01

0.14

1.35

3.21

3.27

Equity

0.04

0.39

10.64

10.64

10.64

EPS (Rs)

0.01

0.14

1.35

3.21

3.27

*Projected

Year ended March 31

Presently the company operates from its 8,000 Sq ft software development
facility at Bangalore. The company now plans to add infrastructure of 10,000 Sq
ft in Bangalore, 4,500 Sq ft in Chennai and a leased office in Detroit, US. The
company plans to spend Rs 2.24 crore for the facilities in India and Rs one
crore for the US office. Other costs relate to computer hardware, software and
related infrastructure.

Having being in the software and hardware segment for the past 15 years with
limited growth, iQ Infotech has now drawn extremely ambitious plans. The company
has so far been providing services in hardware and embedded system design and
now plans to venture into a number of other activities. The company plans to
provide services in design and manufacture of embedded systems, establish
IT-enabled production units, establish medical transcription and legal
proof-reading production centers, develop training centers for e-commerce
solutions and medical and legal transcription, develop e-commerce and
Web-enabled solutions and providing management and systems integration
consultancy.

iQ Infotech will continue to provide services in embedded system design,
which the company has been doing for the Indian defense services. The company
plans to market its activities in this area once the office in US is set up. In
medical transcription, the company plans to build a 5,000 Sq ft facility to
house 60 medical transcriptors (MTs) apart from setting up an incubator facility
whereby entrepreneurs will do transcription jobs in association with the
company. The company’s turnkey services division has already set up more than
15 medical transcription centers with a capacity of 60 MTs each. The company has
also formed a training outfit to provide training in medical and legal
transcription in association with Khodayss Systems. The training will span 4—5
months and the trainees will eventually be absorbed for providing the
transcription services. The company has trained 90 MTs and they have been
employed by the medical transcription centers set up by the company. The plan to
set up its own center has been driven by the success of the training center.

iQ Infotech’s other plans include providing e-commerce and Web-enabled
solutions. The company is currently in the process of developing and providing
Internet and intranet solutions to some companies. iQ Infotech foresees
IT-enabled services and e-commerce services as a high-growth area and plans to
leverage its experience in these areas.

To meet these plans, the company proposes to add 150 professionals to the
current 45 in the current calendar year. The infrastructure will be ramped up
through the funds raised from the current public issue.

Financial performance: Dismal

iQ Infotech has been in existence for more than 15 years, but the financial
performance of the company has been disappointing until the year ended March
2000. While the revenues from software services grew from Rs 72 lakh in March
1996 to Rs 1.01 crore in March 2000, hardware division contribution have risen
from Rs 48 lakh to Rs 93 lakh in the same period. The company declared total
revenues of Rs 1.94 crore in the year ended March 2000, up 58% over the
corresponding previous year. The net profit in the same period rose from Rs one
lakh to Rs 14 lakh. Surprisingly, the performance in the first eight months of
the year has been astounding with revenues from software services at Rs.5.82
crore and that from the hardware division at Rs 54 lakhs. The company has also
crossed the Rs one crore bottomline mark, reporting net profit of Rs 1.1 crore
in the eight-month period.

iQ Infotech has projected revenues of Rs 7.5 crore in 2001 and based on the
performance in the first eight months, the company seems to be on track to
achieve the projected revenues. While the company has projected 100% growth in
the next year ended March 2002, no growth has been assumed in the year ended
March 2003! So much for being ambitious.

Investment potential

iQ Infotech is offering shares of Rs 10 each at a premium of Rs 6 per share.
The offer price of Rs 16 per share discounts the projected March 2000 EPS by 12
times and March 2001 EPS by 5 times. iQ Infotech is one among many software
companies that have recently tapped the capital market to raise funds for
ambitious expansion plans. What differentiates iQ Infotech from some of the
recent entrants is the highly qualified and experienced promoters and the fact
that the company has been in existence for the past 15 years. Apart from these
two factors, none of the other aspects of the company justify the premium
pricing of the issue. Despite being in existence for 15 years, the company’s
performance has been mediocre. Moreover, the company’s plans to engage itself
in a number of activities raise doubts on the company’s ability to create
competitive strengths in any specific segment. Based on the experience of the
promoters, the company expects to change its business model smoothly to exit a
segment witnessing slowdown and enter a segment with better prospects. However,
we believe that the company’s optimism is far-fetched and the company will
find it difficult to match the investor’s expectations of reporting continuous
growth while changing its area of operations as and when the industry prospects
change. As far as the market scenario is concerned, we expect only the large and
medium sized companies to witness flow of investment whereas the small sized
companies will see falling valuations and will be under tremendous pressure to
grow rapidly. Although we do not rule out a few small companies entering the big
league, we believe the existing fundamentals of iQ Infotech neither promise such
an achievement nor justify the premium tag to the offer price. Avoid.

Sushanto Mitra is
the founder of Technology Capital Partners
The views reflected here are of the author and not of this publication. No
liability is accepted for losses based on the information presented here.

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