Background-: Thinksoft is a software testing enterprise focused on the banking financial services and insurances (BFSI) domain. Thinksoft is coming out with an IPO. it plans to use 36% of the total ipo proceeds to create a facility in a Chennai SEZ as part of its expansion plans, with the balance ipo proceeds going to existing investors who are offloading their holdings through an offer for sale.
Business Outlook-: As per NAASSCOM, the BFSI software testing segment is estimated to be one third of the $2 billion testing market and is growing at 15-17% annually. the company has done relatively well compared to industry growing at an average of 25% over the last two years.this might suggest that the company is growing at a fast clip, but part of it is due to the low base effect. due to slowdown the industry is facing tough time. the tough conditions have meant that the company's billing rate (stood at $20-21 per hour as of march,2009) dropped by around 5-10%. a nascent recovery in Europe ( contributes around half of the revenues) is positive. meanwhile, the company is aiming to increase its footprint in the US.
Expansion-: the company is setting up a new software testing facility at Madras export processing zone in Chennai with a capacity of 380-400 seats at an estimated outlay of about Rs 16 crore. this would double the existing seat count. the new capacity, which would be exempt from paying income tax on profits for 5 years, is expected to be completed by march 2011. the new capacity addition, however, would give additional scalability to Thinksoft to attain orders and improve its economics of scale.
Conclusion-: Clients are increasingly going for long term contracts suggesting stable revenue road map besides, indicating enhanced confidence in Thinksoft. this is observed for the existing clients. however enrolment of newer clients has slowed down. the company has taken several steps to manage its cost structure including consolidating office space, which should help maintain operating profit margins at around 16-19%. the positives are its specialised focus in the software testing space and a decent track record, while the flip side is its relatively small size and over- dependence on a single segment. valuations look little expensive. investors who have one year horizon can subscribe this ipo.
Issue Detail-:
Price band--------- Rs 120-130
Issue size---------- Rs 43-47 crore
Issue open---------- 22 Sept. 2009
Issue close---------- 24 Sept. 2009
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