iQ INFOTECH: No Queuing for This One

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.

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.