MASCOT SYSTEMS: Restructuring For Growth

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

country. 

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.

Project

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_{Operations: Set for a big leap}Mascot 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

implementation.

Financial Performance: Moving on the fast

track

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

(All figures in Rs

crore)

Year ended March 31

Sushanto Mitra