Sunday 10 February 2008

IPO Analysis - GSS America Infotech

Investors can avoid the initial public offering of GSS America Infotech, considering the risks associated with its US-centric business model and general negative perception in the markets about the prospects of IT services companies.

At the upper end of the price band — Rs 440 — the offer values the stock at 10 times its estimated current year earnings on a fully diluted equity base. This is close to the valuation commanded by Tier-2 IT players. GSS operates on a smaller scale than most Tier-2 players; but the valuation is not at any serious discount to its larger sized peers. The company has grown its revenues manifold over the last three- four years, from a smaller base. This period coincided with the fastest phase of growth for Tier-1 and Tier-2 IT companies.

However, together with fears of a slowdown in the US and concerns over the sub-prime crisis and lowered consumer spending, the IT services sector is experiencing greater business uncertainty. Weathering the slowdown may require wherewithal that, at this point, only Tier-1 and select Tier-2 players, possess. GSS with its limited track record and complete dependence on US-based clientele may find it challenging to face a double whammy of an appreciating rupee vis-À-vis the dollar and an uncertain macro scenario.

The current volatile market scenario where even better known names are facing challenges in garnering investor interest is another reason for investors to adopt a wait-and-watch approach to this IPO.
Heavy US dependence

The company derives all its revenues from the US, making for a concentrated geographic mix. This subjects GSS to all the vagaries of macro scenario in the US — the possibility of lowered IT spend by clientele, loss of business in the BFSI segment and a possible slowdown in consumer spends.

Geographical diversification may be the key for any company in the IT services space to mitigate these risks. A wider spread may also have aided an expanding footprint and client mining in other geographies.
Vertical Mix

Although the company’s vertical mix has not been disclosed, the list of clients indicates a good number from the retailing segment. This is a segment that is quite vulnerable to a US slowdown, with recent data on consumer spending suggesting moderating consumer spends. The top ten client list, which has many retail, financial services and insurance players, may again be a cause of concern for the company in the context of tightened/ postponed IT budgets.
Less Focus

The company operates in as many as nine verticals, indicating that there may be no specific niche or focus in operations for GSS.

Tier-2 IT services companies usually operate in a limited number of verticals (3-4) and gradually broaden their scope of operations. In a competitive environment where larger players are looking aggressively at client wins, the lack of a niche area as a differentiator, may work against the company.

The revenue concentration creates another problem for GSS, that of a possible appreciation in the rupee against the dollar. Realisations could be under pressure if the extent of appreciation continues to be pronounced. In the event of tightening IT budgets, some vendors may be forced to lower billing rates. With a relatively small scale of operations, the company may not be best placed to work with lowered realisations.

Overall, the company’s fundamentals are reasonable, as indicated by a 21.4 per cent net profit margin over a Rs 204.6 crore revenue base for nine months of this year, but at this point in time, the macro environmental risks may blunt the possibility of gains.
Issue details

The company plans to issue 3.5-million shares in the price band of Rs 400-440. The proceeds are to be used for building a global delivery centre, building offices overseas and working capital requirements. Religare Securities is the book running lead manager to the issue. The issue is open from February 11-15, 2008.