 "IPO REVIEW: Quick Heal Technologies")
Quick Heal Technologies provides security software products for personal computers, laptops, mobiles, and tablets, and enjoys leadership position (market share of 30 per cent) in the Indian retail segment. The company also exports its products to Japan, the United Arab Emirates (UAE), Kenya and the United States but 95 per cent of its revenue comes from India. Apart from the retail-oriented business, it now plans to focus on enterprise and government segments, grow its exports (three per cent of the total revenue currently) and strengthen its research and development (R&D) capabilities to drive future growth, for which it is raising funds. While its long track record, strong brand and domestic market share, foray into enterprise segment and immense potential for growth bode well, high valuations are a hurdle.
On a fully diluted basis, the initial public offering (IPO) is priced at 37 times its FY16 estimated earnings (after assuming 20 per cent earnings growth over FY15). While Quick Heal's leadership in the domestic market partly justifies the premium valuations, it is still high. Its global peer, Symantec, trades at much lower multiple of 14 times CY16 estimated earnings. Symantec enjoys much higher revenues, albeit at similar earnings before interest, taxes, depreciation and amortisation (Ebitda) margins (34 per cent) due to its global scale of operations and has 26 per cent share in the domestic market. Investors with a long-term perspective might, thus, apply for the IPO. The Rs 451-crore IPO includes Rs 250 crore of fresh sale of shares with the rest being an offer-for-sale by Sequoia Capital and promoters.
Of the Rs 250 crore, the company plans to deploy Rs 111 crore towards advertising and sales promotion activities, Rs 42 crore towards R&D and the rest for purchase and renovation of its various offices.
Quick Heal is now looking to increase its presence in the corporate segment, which forms 13 per cent of its revenues and has launched Seqrite brand of products for this segment in 2015.
Investments in R&D, sales and distribution have pulled down Ebitda margins and earnings in the past three years. Margins could improve once the enterprise business achieves scale but that could take few years.
Also, though Quick Heal is well established in the retail segment (87 per cent of revenues), stiff competition from Symantec, Kaspersky and McAfee, among others, means that success in the enterprise segment might not come easily.
Its track record of two decades lends confidence. Quick Heal had 7.13 million active licences at the end of 2015 catering to home users, small offices, enterprises, educational institutions, and government. Its products are available across high and low price points. Healthy cash generation and a zero debt balance sheet reflect strength of its financials. Strong brand name, experienced management, healthy return ratios and 25-30 per cent future dividend pay-out policy are the other strengths.
