Allied Digital - IPO

Allied Digital appears expensive compared to its peers, based on various factors. The Indian information technology (IT) and IT enabled services (ITES) industry has definitely worked wonders, contributing about 5 per cent to the nation’s gross domestic product (GDP).

However, a vast majority of this was ploughed in from exports of IT-ITES services. Riding on this export boom, the domestic IT market too, is growing leaps and bounds. International Data Corporation (IDC) has estimated the Indian domestic IT market to grow by over 22.4 per cent in 2006. NASSCOM pegged this market at over Rs 3,600 crore in FY06, and expects it to grow to Rs 8,000 crore by FY10.

To take advantage of this rising tide, India-focused companies like Allied Digital are on an expansion drive. Allied Digital is out in the market to aggregate about Rs 77-86 crore from the public via an IPO.

The issue comprises of 45.2 million shares of face value Rs 10 each. The price band is fixed at Rs 170-190 for the issue. Allied Digital is an IT systems integrator, providing services and solutions in IT infrastructure management, technical business process outsourcing, remote management services for servers and networks, information security and enterprise computing.

The company boasts of a pan-India presence across 92 locations with more than 1,250 employees. Its clientele includes the who’s who of the banking, financial services and insurance (BFSI), telecommunications, retail, aviation, manufacturing, energy, e-governance and hospitality industries. With the issue proceeds, Allied Digital intends to set up a global service delivery centre, setting up new strategic business units including a network and security operating centre each, a technical BPO outfit and to carry out strategic acquisitions. “We have already identified the targets for the acquisitions.

Two of them are domestic, and one is a Canada-based technical BPO company,” says Bimal Raj, chief executive officer, Allied Digital. “We aim to complete these acquisitions by September 2007,” he adds. Allied Digital has grown its top line at a compounded annual rate of 58 per cent since 1995. The company has maintained its operating margins at around 21-22 per cent, which is slightly lower in the IT pack owing to its domestic focus and a project-based solutions approach.

It is now looking to increase the revenue contribution from its service offerings and outsourcing, which entail higher operating margins. On the flipside, the more than 90 per cent India-centric business saves the company from the vagaries of rupee appreciation. From a valuation perspective, the issue pricing appears stretched in spite of better price-earnings ratios compared to its closest peers.

The segments that the company operates in, pose very few entry barriers to new entrants as well as unorganised competition. Add to this, Allied Digital has been in this business for the past 12 years and still has not been able to scale the business to gain any critical mass. Investors may be better off, exploring other avenues.

The IPO of technology-based education provider Everonn is priced attractively. Investors have developed a keen interest in technology-enabled education providers ever since Educomp’s performance after its listing. The IPO which hit the markets a year and half ago was priced at Rs 125 and currently trades at an astonishing Rs 2,200 levels. Will the market continue to be as positive to companies that wish to enter this space? Promoters of Chennai-based Everonn Systems would surely be hoping for it.

The business of e-teaching
There is nothing extraordinary about the business model of Everonn Systems. The 10 lakh schools and 17,500 colleges in the country need cost-effective interactive solutions to meet the demand of a diverse course curriculum. By creating content once and distributing the same across many schools, colleges and corporates which follow the same syllabus and processes from a central location, Everonn is trying to eliminate the replication of content, infrastructure and teaching professionals. While the logic is sound, is there money in putting up expensive IT infrastructure and convincing people to switch to a different mode of imparting education?

The government will provide
Everonn’s MD P Kishore believes that the 6 per cent of GDP target in the current Five Year Plan for education and computerisation of private schools will boost its revenues (70 per cent comes from government schools) and take care of funding needs of its customers. However, its dependence on government is also a cause for concern. The bidding, implementation and recovery takes a year and has been causing a problem in the company’s cash flow and contributing to the higher interest and finance charges.

Funding growth
To finance some of its ongoing projects, develop infrastructure for high margin segments and fund acquisitions, the company is raising resources to the tune of Rs 66 crore. A part of this, Rs 14 crore, was raised from the Temasek arm, IndoChina Pre-IPO Equity (Mauritius). Nearly 60 per cent of the Rs 50 crore public issue will be used to fund the ongoing West Bengal project where the company is providing IT solutions to 459 schools.

Valuations
While the company has had a 40 per cent plus sales growth and 40 per cent operating margin, at the net level, higher interest costs and depreciation (write-offs based on project period) have dented the net margins to 12 per cent. Analysts say that margins will stay at these levels for the next two years as the proportion of government projects will continue to be the bread-and-butter for Everonn.

At the higher end (Rs 140) of the price band the stock is priced 27 times its estimated FY08 earnings while at the lower end (Rs 125) the discounting is 23 times. While Educomp has had an impressive record of consistent growth, its current P/E at 128 indicates the scope for appreciation for its smaller rival.

HDIL

HDIL is priced attractively compared to its peers, and leaves enough on the table for investors. Real estate stocks have grabbed more attention on the bourses than any other sector during the last fiscal. Issues like Parsvnath Developers, Sobha Developers and the like received formidable investor interest and made big bucks on listing. However, rising interest rates, increasing cement prices and fears of correction in real estate prices took away the sheen from the sector for a while. The spark returned with the DLF initial public offer (IPO) at Rs 9,187 crore, which was the biggest issue from the realty sector, and got subscribed by 3.5 times. In the secondary markets, realty stocks like Ansal Properties, Lok Housing, Parsvnath Developers, Peninsula Land, Sobha Developers and Unitech recovered from their lows as soon as the DLF IPO was approved by SEBI. The primary market too, is about to be set abuzz again, by upcoming issues of realty companies like Housing Development and Infrastructure (HDIL), which opens this week.

The deal
HDIL, a Mumbai-based realtor, is looking to raise between Rs 1,277-1,485 crore with an issue of 2.97 crore shares, priced in the range of Rs 430-500. The issue has a greenshoe option of 4.45 million shares. HDIL will garner a market capitalisation larger than Sobha Developers and Parsvnath Developers after the issue, amounting to nearly Rs 10,000 crore, depending upon the issue price and the greenshoe option. Nearly 80 per cent of the issue proceeds are earmarked to be spent on construction of new properties and the rest will be invested in acquiring new land. The proposed land acquisitions are already underway, and 75 per cent of the cost of land has been paid for.

Far and wide
HDIL, part of the Wadhawan group, has promoted housing finance company Dewan Housing Finance, food retail chain Spinach and a hospitality outfit called Dish. At present, HDIL boasts of a land reserve amounting to 2,574 acres or 112 million sq ft. Of this, nearly 85 per cent of the land is in and around Mumbai. The rest is in cities like Hyderabad and Kochi. So far, it has completed projects aggregating approximately 10.9 million sq ft of saleable area and has about 46 million sq ft shaping up under development.

The company focuses mainly on residential, commercial and retail projects. Apart from this, the company is a dominant developer under the slum rehabilitation scheme (SRS) of the government of Maharashtra. Around 2 million sq ft of an additional development has been completed under the SRS. “SRS projects involve rehabilitation of slums at a fairly low cost, which aids us in achieving higher profitability,” claims Sarang Wadhawan, managing director, HDIL.

Realty flight
The Indian real estate market was pegged at approximately Rs 49,000 crore in 2005, and is expected to grow to Rs 203,000 crore by 2010 at a compounded annual rate of 33 per cent. While rising affordability in the large middle class has triggered a residential real estate boom, the commercial segment is riding high on demand from industries like information technology, outsourcing and retail. Even though smaller area of land is being developed in metros compared to all the development across the country, the value of the land being developed in metros overtakes the rest of the country.

In most parts of Mumbai alone, real estate prices have nearly doubled over the past 18-24 months. Again, under the slum redevelopment schemes, Mumbai has lined up around 530 acres of land to be rehabilitated, the city being home to the largest slum in Asia. SRS projects leave the developers with a sizeable chunk of excess land for sale, which ensure extraordinary returns from such projects. Currently, HDIL has 13 ongoing SRS projects, totalling about 7 million sq ft of saleable land, leaving aside the 6 million sq ft land earmarked for rehabilitation. The company has balanced its project portfolio with as many non-SRS projects, in order to de-risk its business from the uncertainties involved in SRS projects.

Valuation
HDIL has given strong financial performances over the past three fiscals, with occasional spikes and dips in its numbers. The company has delivered a compounded revenue growth of over 330 per cent annually over FY05-FY07. The operating margins for FY07 were a healthy 52 per cent, with a net profit margin of 46 per cent for the same period.

The key risk to the company lies in the concentration of its projects in and around the Mumbai region which makes it vulnerable to any potential correction in real estate prices. Analysts estimate a correction of about 10 per cent in Mumbai realty prices over a year, even though the demand outlook over the long term looks robust. However, the company has a balanced project mix, which may help it curbing the correction.

The issue has been priced attractively, at 17 times and 20 times its FY07 earnings at the lower and upper ends of the price band, respectively. This makes it inexpensive compared to its peers like Akruti Nirman, Anant Raj Industries, Parsvnath Developers and Sobha Developers, which are valued in the range of 32-41 times their FY07 earnings.

The issue therefore, appears worth subscribing, as there is enough left on the table for investors.