Investors can give the initial public offering of RFID and Smart Card solutions provider, Bharatiya Global Infomedia (Bharatiya), a miss. A hardware-intensive offering with limited scope for value add, intense competition from large-sized entrenched players, as well as limited revenue visibility are key factors that weigh on the company.

Valuations too are out of sync with peers. At the upper end of the price band (Rs 75-82), the stock would trade at 16.4 times its FY11 per share earnings on its pre-offer equity base and over 29 times its post-offer equity base. This makes it much more expensive than comparable players such as Bartronics India and Prime Focus, which have superior track record and are available at low single-digit price earnings multiples.

Over the last four years, Bharatiya has seen its revenues grow by a compounded annual rate of around 24.5 per cent to Rs 71 crore in FY11, while net profits grew at 16.1 per cent to Rs 4.5 crore. The company was hit hard during the slowdown in 2008-09 and recorded a tiny profit of just Rs 6.9 lakh in FY09, suggesting that it may be quite vulnerable to adverse economic conditions.

Business challenges

Bharatiya provides Radio Frequency Identification (RFID) based tags, special data carriers as well as smart card solutions for clients in areas such as traffic engineering, facility management, personnel management and custom solutions. These are used for tracking the identity and location of materials, inventory and even people. The company also operates in the media segment and offers post-production services, which forms a small part of revenues. The company gets a large portion of its business in the form of sub-contracts from large-sized companies such as Honeywell Automation, Johnson & Controls India, Siemens Building Technologies and HCL Infosystems. It derives relatively smaller value contracts from its own channel, making it more dependent on these sub-contracts.

Subcontracting by itself is a margin dilutive business. This, together with the fact that much of the company's work is highly hardware-intensive, accentuates the problem. The company's purchase costs have been continuously rising over the past few years, suggesting that it has not been able to win more of higher-margin services deals.

This aspect also pegs Bharatiya to the lower end of the value chain in RFID solutions delivery. Just as a frame of reference, Bartronics reported revenues of over Rs 900 crore in FY11 and has a net margin of over 13 per cent, with a healthy blend of hardware, software and solutions.

Pricing pressure

Competition from companies such as Bartronics and larger players such as CMC in the RFID segment would mean that the company could face significant pricing pressure as well. The added problem here is that players such as CMC are increasingly targeting the meatier services portion in system integration deals, which means that smaller players such as Bharatiya may have to continue to focus on the hardware installation part. Also, in areas such as biometrics and bar coding, Bartronics has a superior track record and is part of several e-governance initiatives.

Bharatiya's order book position too does not appear inviting. As of March 2011, the company had a order book position of only Rs 27.8 crore, which is about 39 per cent of its FY11 revenues. This makes for limited revenue visibility as the deal flow may be more ad hoc rather than a steady stream.

Bharatiya also derives about 5 per cent of its revenues from the media and entertainment business and here too players such as Prime Focus and DQ Entertainment are larger, with superior margins. There appears limited or no synergies in providing RFID solutions and delivering post-production services. The offer is open during July 11-14.

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