MICROCON INTERNATIONAL: Micro Size, Macro Price

Fact

Sheet

Microcon International



722/22, 10th ‘A’ Main, IV Block, Jayanagar, Bangalore - 560 011


Tel: 080-665 4409, 665 4427


Fax: 080-665 4413


www.microcon.net 


   


Proposed Listing



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

Public Issue 

• No. of Shares: 2,800,000 
• Issue Price: Rs60 (including premium of Rs50 per share) 
• Issue Opens: To be announced 
• Issue Closes: To be announced

One look at the current state of

the capital market suggests that the party has ended for IT companies. On the

other hand, aspirant companies queueing up to tap the capital market only seem

to be increasing. During the past 12-15 months, a number of companies have

raised funds through IPOs. However, the recent slump in IT stocks has cautioned

the investors. With the increase in the number of IT companies on the stock

market, investors have a wide choice for investment.

While IT majors such as Infosys,

Wipro and Satyam are traded at a profit to earning ratio (PE) of more than 75,

it is unlikely that all the companies in the sector would command similar

valuations. Bangalore-based Microcon International is one such company which

plans to offer shares to the public to fund its future plans. The 17-year-old

company is offering shares at a premium of Rs50 per share.

Background

Microcon International was founded by Ravi

Narayanan as a private limited company in June 1983 as Microcon Instruments and

Systems. In July 1994, it was converted into a public limited company.

Narayanan, Micron’s MD, holds a BE degree in electrical engineering from

Madras University and has been heading the company’s operations since its

inception. He has experience in the fields of testing, tracking and controls and

has been a consultant to several companies in India and abroad. Microcon

commenced operations with a focus on total solutions and systems in the fields

of embedded systems, in-product software, control and automation and testing for

the manufacturing and defense industry. Till 1997-98, the company was engaged

mainly in providing technological solutions to Defense Research and Development

Organization labs using imported technology from USA. However, the US government

imposed sanctions on all Indian defense establishments for importing such

technologies after the nuclear blasts conducted by the Indian government. This

severely affected the company’s projects and it was compelled to restructure

its operations.

Today Microcon operates in the

areas of defense electronics, embedded systems, manufacturing and industrial

systems and simulation application software through its products and services.

In order to finance its expansion plans, Microcon is now coming out with its

initial public offer (IPO) of 2,800,000 equity shares. The company has declared

bonus thrice since incorporation–at one share for every two shares held in May

1995, one share for every two shares held in December 1998 and four shares for

every three shares held in January 2000.

Operations: Getting concise

Microcon’s operations are presently organized

into three divisions–internet and communication, intelligent manufacturing and

interactive simulation. For the year ended June 1999 the internet and

communication division was the largest contributor to its total revenues at 70%

compared to only 17% during year ended June 1998. This division provides

customized application development and products for internet with special focus

on ecommerce. The products of the divsion are TIP virtual internet plaza, OCE

print on demand and the Nusa network. This division is located at Bangalore with

an area of 7,500 Sq ft. Micron’s second division, intelligent manufacturing,

is engaged in providing turnkey solutions in control and automation to

manufacturing industries in the areas of ERP, CRM and supply chain management.

The products developed by this division are Kapes–a knowledge aided planning

and estimation system–that could be used in both pre and post production. Its

other products are manufacturing execution system and quality assurance system.

Snapshot Microcon

Areas of operation Defense electronics, embedded systems, manufacturing and industrial systems and simulation application software. Divisions Internet and communication, intelligent manufacturing and interactive simulation. Where the IPO fund would go Major portion toward repayment of existing debt, which mainly comprise term loans from financial institutions. Overseas offices to be set up in Europe, the USA and the far east. Strategic business Internet, communications and interactive simulation. Impediments for future growth Sales projections for the current year indicate a growth of only 13% over the previous year.

The division has contributed 30%

to the total turnover, up from 6% in the previous year. This division has also

developed tracking systems targeted at the tube mill industry–the XDC suite of

products. The suite comprises Krama Vision–an interactive client-server engine

that integrates voice, video and data communication over LANs, WANs and the

internet, Krama Virtual Technology Park (Krama VTP)–a centralized facility

that enables companies registered with that VTP to share the available resources

and Krama Virtual Interactive Training (Krama VIT)–a web-based classroom

development and management tool. This division is located at Bommasandra,

Bangalore, with a total area of 13,000 Sq ft.

Microcon’s third division is

the interactive simulation division, which develops and provides high

performance customized, interactive simulation and virtual reality solutions.

This division has developed two products–environmental control system (ECS)

and simulation-based training (SBT). For the year ended March 1998, the division

was the biggest contributor to the turnover at 78%. However, during the last

year the division did not generate any revenue. The division is situated at

Electronics City, Bangalore and measures 6,000 Sq ft.

Some of the major clients of

Microcon include VXI Tech, USA, Anteve, Indonesia, DEBIS, Germany, Intersoft,

Netherlands; Daimler Benz Aerospace, Germany; DRDO, India and DMS, France.

Microcon has a wholly owned

subsidiary in the name of Microcon SPM. The company is engaged manufacturing,

servicing in special purpose production machines, testing machines, standard

production machines, control panels, tooling and accessories, components, parts

and other equipment used in defense, industrial and chemical laboratories,

scientific processes and computer peripherals. For the year ended March 1999,

Microcon SPM reported a turnover of Rs1.74 crore posting a growth of 176% over

the previous year. However, net profit grew marginally to Rs32 lakh compared to

Rs24 lakh during the previous year. Some of the clients of the company include

Brakes India, Chennai, IFB Industries, Bangalore, Lucas TVS, Chennai, Rane Brake

Linings, Chennai, Wheels India, Chennai, PT Autoliv, Indonesia and TIRA

Machinenbau Gmbh, Germany.

The promoters of Microcon also

floated a company in the name of Microcon IVS in January 1998. The activities of

the company include developing virtual reality and interactive simulation-based

products and training. These enable the creation of interactive environments for

a variety of applications. The company did not have any operations until last

year.

Microcon plans to raise Rs16.80 crore through its

forthcoming public issue of 2,800,000 equity shares of Rs10 each at a premium of

Rs50 per share. The rest of the funds for the project have already been

mobilized through the issue of 200,000 equity shares of Rs10 each at a premium

of Rs50. Out of the total funds, the company has allocated a major portion

amounting to Rs6.00 crore toward repayment of its existing debt, which mainly

comprise term loans from financial institutions. Overseas offices are proposed

to be set up in Europe, the USA and the far east, by the end of September 2000.

The infrastructure is expected to be in place by the end of August 2000.

Future plans: Changing focus

Intelligent manufacturing has

been the core business of Microcon for the past five years. In future, this

division would continue to contribute significantly to its revenues. The company

plans to operate in two vertical markets–intelligent manufacturing and

communication–through its wide range of end-to-end products and services. The

company’s proposed offices in the international markets are expected to take

its operations global. Microcon has outlined internet, communications and

interactive simulation as its strategic businesses. Meanwhile, its core business

would help the company to stabilize its position in the IT sector. The company

changed its business focus after the imposition of sanctions by the US in 1999

and is in the process of stabilizing its business operations. While the company

has ventured into the internet arena, a segment growing at a rapid pace, the

next twelve months would be crucial for the company to set up a base for future

growth. The company’s future operations would depend on how well it is able to

meet challenges and competition from the IT majors in the country.

Financial performance: Unimpressive

Since its incorporation, Microcon’s

financial performance has been steady with an average growth rate of 20.6%.

However, the year ended June 1998 was a bad year for Microcon. The company

recorded a net loss of Rs83 lakh due to sanctions imposed by the US government

on all Indian defense establishments as a fall out of the Pokhran nuclear tests

in the country. The ongoing south east asian economic crises during that time

added to Microcon’s woes. The sanctions prevented Microcon from importing US

technology used to execute a majority of DRDO orders. Subsequently, Microcon’s

operations were restructured to focus on IT business and markets, which saw the

company posting a growth of 43% in turnover for the year ended June 1999 and a

net profit of Rs1.03 crore compared to a loss of Rs83 lakh in the previous year.

For the first half of the current year ended

December 1999, the company has recorded a turnover of Rs3.50 crore and a net

profit of Rs1.01 crore, which is mainly due a control in operating costs imposed

by the company. Microcon has projected a 13% growth in turnover for the current

year, which is much lower than that achieved in the last year. On the other

hand, Microcon has projected a net profit of Rs2 crore for the current year, an

estimated growth of 94% over the previous year. The company can achieve this

target as it has already recorded a net profit of Rs1.03 crore in the first half

of the current year.

Investment potential: Overpriced

Microcon is offering its shares at Rs60 each

discounting its projected June 2000 EPS by 30 times. Though the company recorded

a good financial performance during the last year through restructuring of its

business in 1998, its growth in the coming years would depend mainly upon its

ability to cope with change in the business model. Moreover, its sales

projections for the current year indicate a growth of only 13% over the previous

year. This is a serious impediment in the company’s growth prospects. The

company’s offer price is on the higher side especially with the kind of

beating received by IT stocks of late. While the company’s background and

experience in IT provides comfort, Data Stock believes that there is limited

scope of appreciation after listing considering the current valuations. 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.