Saturday 9 February 2008

IPO Review - GSS America Infotech

Incorporated in 2003 and promoted by first generation entrepreneurs and technocrats Bhargav Marepally and Ramesh Yerramsetti, GSS America Infotech (GSI) is a total IT solution provider spanning consulting, enterprise application integration and infrastructure management/managed services. Its web-based business service management product Control-M gives administrators and users an intuitive and easy way to control and manage the business environment. Almost 100% of the revenue are housed under its 100% subsidiary GSS America Inc. Currently, all the revenue is derived from the US market.

Enterprise Application Integration (EAI) contributed 39% of the revenues; infrastructure management services (IMS) 42%, and products 10% in the nine months ended December 2007. The Top 5 clients contributed 14.89% and top 10 clients 21.90% of the total revenue.

GSI has four delivery centres: two offshore centres in Hyderabad, with capacity of 270 employees; and two nearshore centres in Chicago, US, with capacity of 150 employees. The employee strength is 717. Of this, 400 are onsite. The average offshore experience is about six years. The onsite/offshore mix by revenue stands at 75:25 and by efforts 50:50.

Since incorporation, GSI has made three acquisitions. US-based consulting company Infospectrum Consulting Inc. was taken over from 1 April 2006. Infospectrum Consulting reported revenue of Rs 75.95 crore with net profit of Rs 12.45 crore in the nine months ended December 2007. All the shares of US-based System Dynamix Corporation was acquired through 100% subsidiary GSS America Inc. in December 2007 for US$ 6 million in cash and US$ 6 million in net current assets along with an earn-out of maximum US$ 6 million over three years. System Dynamix clocked revenues of US$ 23 million with net income of US$ 2.75 million in calendar year 2007.

The net proceeds of the initial public offering (IPO) would be utilised to set up Global Delivery Centre (GDC), with a capacity of 1,000 employees, at a cost of Rs 66.10 crore in Hyderabad by March 2009; to set uo overseas offices in Europe, Middle East and Far East at a cost of Rs 9.81 crore; to meet working capital requirement (Rs 25 crore); and the balance for acquisitions and issue expenses.

Strengths

  • Margin has been continuously increasing despite the pressures of rupee appreciation, proving operational efficiencies and high billing rates. Operating profit margin went up from 17.7% in the year ending March 2006 (FY 2006) to 25.8% in the nine months ended December 2007.

Weaknesses

  • All the revenue accrues from the US. Thus, prone to the fallout of US recession and dollar depreciation.
  • Operations are project based and are mainly time and material contracts, increasing the risk of termination of contracts. This could impact revenue and profit.

Valuation

At the price band of Rs 400-Rs 440, P/E works out to 9.1-10 times on annualised nine-month EPS of Rs 43.9. The IT sector has been suffering severely from adverse market sentiments. Most IT stocks including majors have been beaten down substantially. Comparable IT companies with high onsite contribution are Zylog Systems (trading at 6.4 times its trailing 12-month EPS of Rs 45.7) and Prithvi Information Solutions (trading at 5.9 times its TTM EPS of Rs 55.5).