Taksheel Solutions - IPO: Avoid

Investors can give the initial public offering of Taksheel Solutions, a software service player, a miss, given the relatively expensive nature of the offer and the challenges in its key business segments. Limited areas of operation, complete dependence on the US and client concentration are key risks that the company faces. At the upper end of the price band (Rs 130-150), the company would trade at a valuation multiple of 12 times its FY11 earnings on a post-offer diluted basis.

This is at a premium to mid-sized IT players with a stronger track record, such as Nucleus Software Exports and 3i Infotech, that are available at 3-8 times. The company has grown at a fairly strong pace. Over a four year period leading up to FY11, the revenues of Taksheel grew at a compounded annual rate of 87.7 per cent to Rs 147.3 crore, while net profits expanded at 36.6 per cent to Rs 27.4 crore. But much of this has been achieved in 2010-11 when the company nearly tripled its revenues and more than tripled its profits. The company attributes this to fresh addition of clients.

Business constraints

Taksheel focuses on delivering services to clients, mostly financial institutions that are into wealth management solutions. This segment contributes over 70 per cent of the company's overall revenues. Not only does it present a concentration risk on a single vertical, there are other challenges as well.

There are several software companies in the mid-sized category that focus on the BFSI segment and grow at a steady clip. They do so by delivering services across retail and wholesale banking, capital markets, insurance, investment banking, and so on. But to focus on a niche area even within BFSI is a risk for Taksheel, especially given that all asset classes — equity, debt and gold — face challenging times. Given the cyclical nature of investments, wealth management business can swing in fortunes significantly, thus affecting the IT spends of clients significantly. The company also derives all its revenues from the US, an economy that faces severe debt and growth challenges. If proposals such as increasing taxes for the rich, who generally avail of wealth management solutions, go through, and the current volatile market conditions continue, clients would be faced with lower volumes. The top 10 clients of Taksheel account for over 80 per cent of its revenues which exposes it to the vagaries of any ramp down and pricing reductions to a significant extent.

The only other vertical that the company focuses on is telecom. This vertical has been in the doldrums for large and mid-sized software companies for the past couple of years. It is expected to turn around only after a couple of years, which means that this segment may not deliver significant revenue growth for the company.

With clients across-the-board engaging in vendor rationalisation, small players such as Taksheel may face find it difficult to compete with other entrenched players. The company has had negative cash flow from operations till FY10 as a result of high levels of sundry debtors and receivables and has only marginally positive cash flow in FY-11.

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