A Risky Investment

Micro Technologies (India) derives more than 85 per cent of its total income from sale of software and hardware products. The remaining contribution is from software projects and development, training fee and maintenance and labour. The company has undertaken customised software work and project implementation for clients like BPCL, Department of Atomic Energy (DAE), MTNL, Bhabha Atomic Research Center (BARC) and SICOM.

It has also been involved in development of both on-line and off-line software applications for a number of government organisations. This is an indicator of a gradual transformation of the company from being merely consultants to system integrators with capabilities of implementing the solutions recommended.

 

Various products of the company have been independently certified as comprising intellectual asset the value of which, as assessed by Systems Research Institute (SRI), Pune on April 26, 1999, was Rs 12 crore. The company has also obtained copyrights for many of its products like The Micro Office Desk System _ Office Management Software.

Micro Technologies is now looking to build on this asset base by increasing its scale of operations. It is looking to target national and international markets along with its existing clients whose demands have not yet been addressed. To achieve this the company needs to invest in infrastructure for which it needs capital and for which it is approaching the capital markets.

The proposed equity issue of Rs 8.25 crore is to part finance expansion costs of setting up development centres, corporate office and overseas office. A part of the proceeds would also be used to retire some debt and to meet working capital needs. The company would also use a part of proceeds for strategic acquisitions to add strength and value for which it would deploy Rs 2 crore of proceeds with banks till a suitable target is identified.

The total cost of the project has been estimated at Rs 17.50 crore. The promoters would being in Rs 6.75 crore towards meeting the cost of project. The balance Rs 0.50 crore would be raised through internal accruals. The current equity capital of the company stands at Rs 4.12 crore. After the current issue, the equity capital would increase to Rs 5.5 crore. The stake of promoters in the company after the issue would be at 43.97 per cent, same as prior to the public issue.

Micro Technologies has declared results upto nine months ended December 1999. In which, the company reported a turnover of Rs 5.15 as against total turnover of Rs 3.65 crore for the entire fiscal ended March 1999. The net profit for the first nine month of 1999-2000 was Rs 0.69 crore against Rs 0.44 crore last year. For the entire year ending March 2000 the company is projected to make a net profit of Rs 1.09 crore on a turnover of Rs 8 crore.

The outlook for next couple of years as per the appraisal of Indian Overseas Bank is very rosy. The total turnover from sales and service for the year ended March 2001 has been projected at Rs 20.17 crore. The net profit at the end of year 2000-01 is estimated to be at Rs 4.36 crore.

These projections looks ambitious if we consider the current scale of operations of the company and also the localised reach of the company. Currently the company does not have any national presence outside Mumbai and has no international presence. In such a situation it looks difficult as to how the company would more than double its turnover and quadruple the net profits within a year. True, the company boasts of an impressive client list but it looks difficult, in the face of stiff competition, even if the company can leverage this advantage to spread out of India and even internationally.

According to the projections contained in the prospectus the company is expected to make a net profit of Rs 1.09 crore for the year ended March 2000. This yields an EPS of Rs 1.98 on a diluted equity of Rs 5.5 crore. This EPS of Rs 1.98 discounts the offer price of Rs 60 (Rs 50 premium) about 30 times. Though this issue is at the lower end of valuations for the highly-prized IT sector, considering the bearish state of the secondary market and the trend of some of the recent IPOs listing below issue price, it would be a considerable risk investing in the issue.