MASCOT SYSTEMS: Restructuring For Growth



No.1, Main Road, Jakkasandra,
Off Sarjapur Road
Koramangala Extension Bangalore – 560 034
Tel: 080-5521701, 5521706
Fax: 080-5521704 

Proposed Listing 
(Stock Exchanges): 
Bombay Stock
Exchange, National Stock Exchange, Bangalore Stock Exchange

Offer Price

  • Book
    to Rs580

  • Public Issue:
    To be announced (Expected in the range of Rs480 to Rs580)

Shares offered through

  • Book Building:
  • Public Issue:

Opening/Closing Date

  • Book Building: April
    10, 2000 to April 18, 2000
  • Public Issue:
    May 2, 2000 to May 4, 2000

Most Indian
software companies seem confident on the sustainability of their growth. This
confidence comes from the steady annual growth of 50-60% over the years.
Increasingly however, turnover growth cannot be achieved without massive
infrastructure expansions and acquisitions of other businesses. Both these
require large amounts of capital, which is now available in India with the
current high stock market valuations. These valuations are today quite
attractive even compared to US markets. Consequently, some companies that were
initially headquartered in the US with had operations in India, are now
restructuring their operations to tap the Indian capital markets. 

US-based iGate Capital Corp, a
company listed at Nasdaq, with operations around the globe has decided to list
its Indian subsidiary, Mascot Systems, after restructuring its worldwide
operations. Bangalore-based Mascot Systems, is coming out with a Rs85.92 crore
book building and public issue to set up a software development center in the

Background: Serving the parent

Mascot was originally
incorporated as a private limited company by Sunil Wadhwani and Ashok Trivedi,
promoters of iGate, USA–formerly Mastech Corp–in December 1993. iGate is
listed at Nasdaq with calendar 1999 earnings of $43.7million on a turnover of
$471million. In 1996, Wadhwani and Trivedi transferred their entire holding in
Mascot to Mastech Systems Corp, a subsidiary of iGate, making Mascot a wholly
owned subsidiary of Mastech Systems Corp. Wadhwani is Mascot’s chairman while
Trivedi is its vice-chairman. The day-to-day operations of Mascot are vested in
its MD V Chandrasekaran, a graduate from IIT Madras. Before joining Mascot in
November 1999, he was President, Wipro Systems, from 1992 to 1999.

Subsequent to its conversion into
a public limited company in January 2000, the par value of its shares was split
from Rs10 per share to Rs4 per share. Thereafter the company issued bonus shares
in the ratio of 17:1 in January 2000 followed by a rights issue at Rs12.50 per
share in February 2000 to Mastech Systems Corp. The Mastech group is currently
undergoing a massive restructuring exercise under which all global software
solutions of Mastech based in North America, Europe and Asia are being
transferred to Mascot. In January, this year Scott Systems, also a subsidiary of
Mastech Corp, transferred its business including its employees to Mascot. This
was done on a concern basis by way of slump sale for a total consideration of
Rs3.96 crore. Mascot now plans to come out with its IPO of 3,000,000 equity
shares. Of the total, 2,250,000 shares will be offered through the book-building
route in the price range of Rs480 to Rs580, while the balance shall be at a
fixed price following the book building.


 (Rs Crore)
Expansion and
setting up of existing offshore development centers
Creation of new
facilities and property acquisition
for future development
Acquisition of
capital equipment at international branches and capital equipment
of Finance


(Rs crore)

Term Loan from

Operations: Set for a big leapMascot is a software solutions
company with a focus on design, deployment and management of software
applications solutions that support businesses. During the year ended March
1999, the company derived 43% of its revenues from custom solutions, 29% from
application maintenance outsourcing, 12% from application re-engineering and 11%
from ebusiness solutions, while the balance came from business intelligence
solutions. Mascot provides these services to a wide range of vertical industry
segments with a focus on manufacturing, finance and banking and telecom. Mascot
has developed a proprietary solutions suite called SmartAPPS, which the company
uses as a framework for its distributed delivery solutions. A major portion of
the company’s revenues amounting to 85% come from its offshore activities
while the rest comes from onsite activities. The company has no presence in the
domestic market with entire revenue being generated from export markets. Mascot
operates from its three offshore development centers located at Bangalore, Pune
and Madras measuring a total area of 1,35,000 Sq ft with the capacity to house
1,300 employees. The company also has offsite development centers in the US and
Canada measuring 25,000 Sq ft and the capacity to house 120 employees. Today
Mascot operates in six countries through its marketing offices, which have a
total of 1,211 employees–586 based in India, 292 in other parts of Asia, 246
in North America and the balance in Europe. Of the total number of employees the
company employs 840 programmers. The company has an impressive list of clients
such as General Electric, Dresdner Bank, Circuit City Stores and
Hewlett-Packard, among others. Mascot’s latest move has been the announcement
of a 50:50 JV with eDebis IT Services, a $3 billion operating unit of
DaimlerChrysler Services (Debis) AG. The yet to be named JV will help Debis IT
services to establish itself as an offshore solutions provider using the
SmartAPPS framework of Mascot in the European market.

Mascot plans to raise Rs85.92
crore through its forthcoming IPO and the balance from a term loan of Rs10 crore.
The funds are proposed to be used over a period of two years by the end of
financial year ending March 2002. The funds would be utilized for leasing a
32,500 Sq ft facility at Pune, setting up a 55,000 Sq ft facility at Bangalore,
setting up a 300,000 Sq ft offshore development center in Bangalore and
investment in interiors and hardware at its existing and new facilities. The
company is offering 2,250,000 shares through the book-building portion and
750,000 shares through the fixed price issue to the public. The shares having a
par value of Rs4 each and are proposed to be listed at BSE, NSE and Bangalore
Stock Exchange. Post issue, the promoters will hold 80%, public 10% and the
balance will be held by employees by way of stock options.

Future plans: E-shore centricMascot’s business is built on
the now well-established offshore model using India’s competitive advantages
in technical skills and process management. The company has therefore set out
most of the proceeds mobilized from the public issue to upgrade its current
offshore facilities and to set up new offshore centers. Mascot’s employee
strength at the end of the year ended March 2001 is expected to reach 2,000 with
1,200 employees based in India while the balance will be located overseas onsite
as well as offsite. In the past Mascot functioned purely as an offshore delivery
center for its parent, Mastech Systems. Post restructuring Mascot will interact
directly with clients and manage its projects independently through offshore,
onsite and offsite solutions. The company’s thrust is however on offshore
activities and it plans to gradually reduce software development at the client
sites. Mascot’s business model in the future will be driven by ecommerce
solutions with the company estimating 25% of its revenues from e-solutions by
the end of March 2001. Further by the end of March 2002, the company expects
e-solutions to be the biggest contributor to its revenues, at 34%. In order to
achieve its e-initiatives, the company plans to leverage its own and its parent’s
direct presence in the US, a key market. This presence will also be used to keep
pace with the latest technology trends. It will help the company to add value by
delivering quality solutions to its clients. Mascot plans to enter into business
alliances and JVs with established local players in the international markets
catering to vertical segments with a focus on telecom, finance and
manufacturing. Further, the company also plans to acquire companies enabling it
to provide services ranging from vertical consulting, IT planning and

Financial Performance: Moving on the fast

Mascot recorded a turnover of
Rs25.64 crore for the year ended March 1999 posting a growth of 62% over the
previous year. Net profit during the same period grew to Rs2.25 crore from
Rs1.39 crore. While the company’s turnover has shown an impressive growth, its
operating costs have also increased. As a result, its operating profit margin (OPM)
has fallen from 36.99% for the year ended March 1998 to 35.26% for the year
ended March 1999. The company has been operating at a very low net profit margin
(NPM), which stood at 8.62% for the year ended March 1999. This was against an
NPM of 8.73% for the year ended March 1998. The company’s financial
projections for the year ended March 2001 are of the restructured entity and
hence not comparable with the previous year.

Investment potential: Reasonably priced

Mascot is offering shares at a
price range of Rs480 to Rs580 per share discounting the project March 2001 EPS
by 26-32 times. Recently, HCL Technologies had offered its shares of Rs4 par
value at Rs500-580 at 47 times projected EPS. However, the market situation has
changed considerably in the past one month. The sky-high valuations of the
software companies have taken a beating in line with the fall in the share
prices of technology companies at Nasdaq. The runaway rise of stock prices has
therefore been arrested, especially among second and third rung companies. The
investor interest is likely to be focused on stocks with global reach, quality
revenues and offshore centric models.

Mascot’s issue has been priced
taking into consideration the recent fall in software stocks and therefore is
reasonable. While volatility in the markets can curtail immediate appreciation
in the stock upon listing, Data Stock anticipates long-term appreciation of the
company’s shares. Subscribe

Financial Performance

(All figures in Rs

  1998  1999 2000* 2001*
Sales 15.87 25.64 66.41 323.37
Other Income 0.05 0.46 0.65 1.39
OPM (%) 36.99 35.26 21.66 24.35
EBIDT 5.87 9.04 14.39 78.76
Net Profit 1.39 2.25 4.21 49.54
Equity 0.30 0.30 9.60@ 10.80@
EPS (Rs) 46.33 75.00 1.75 18.34

Year ended March 31

# increase in equity on account of IPO

Sushanto Mitra

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