Thinksoft Global Services Ltd, a software testing company with annual sales of Rs92 crore, is making an initial public offering (IPO) worth close to Rs45 crore. Information technology (IT) stocks, including many in the mid- and small-space have been doing well in recent months and, so, the timing of the issue is ideal from the company’s perspective.
Investors, however, need to keep in mind that the company has been rated as having “below average fundamentals” by Icra Ltd. Besides, private equity firm Euro Indo Investments Ltd (EII) and its promoter Vinod Ganjoor, who together own 29.3% of the company, will be offloading 90% of their stake during the IPO. In fact, the offer for sale of their shares accounts for 63% of the total shares on offer during the IPO. The issue of fresh shares will help the company garner only around Rs17 crore.
While there have been offers for sale of shares during other IPOs as well, one doesn’t recall a significant shareholder selling almost all of their holding at the time of the IPO. EII is an arm of EurIndia, which had also invested in Allsec Technologies Ltd in the pre-IPO phase and now has no holding in the company a few years after its listing. In the case of Allsec, EurIndia did not offload any of its shares during the IPO and had a significant stake of about 18% after its listing, which was brought down gradually. Of course, EurIndia will make a handsome profit of 500-550% on the investment it made in Thinksoft in 2000 and 2001, if the IPO gets fully subscribed, so the offer for sale makes immense sense for it.
Investors, meanwhile, have to not only grapple with the fact that a primary investor is cashing out, but also that Thinksoft’s business may suffer in the medium-term owing to the upheaval in the banking and financial services industry. The company gets all of its revenues from software testing for the banking, financial services and insurance (BFSI) sector. Industry experts say that because of the large changes in the industry in the past year, IT outsourcing work from this sector will be far lower compared to the past few years. Besides, the top customer accounted for 26% of revenues and the top 10 customers contributed to 93% of total revenues last year.
As Icra points out in its rationale for rating Thinksoft as a company with below average fundamentals, “Such high domain and client concentration heightens the impact of any order volatility on revenue growth.”
While there are these risks, the company has grown revenues at a healthy compounded annual growth rate of 36% in the past three years and profit has grown at an impressive CAGR of 59%. Also, the issue has been priced at a not-so-high valuation of between 7.2 and 7.8 times trailing earnings. For those with an appetite for risk, Thinksoft could deliver high returns in the future as well.