FATPIPE NETWORKS INDIA

Fatpipe Networks India entered the capital market on 7^th June 2010, to raise Rs. 49 crores and the issue was to close on 9th June. But the response to the IPO was very poor; the issue had remained undersusbcribed, with just 0.71% response till 9th June evening. And now the issue has been extended till 14th June. The price band, which was earlier at Rs.82 to Rs.85 per share, has now been revised to Rs.80 to Rs.85.

The company provides router clustering products for Wide Area Networks (WAN), which are assembled and marketed primarily in US. It is looking to expand its markets to Europe, China, India, Africa and Middle East.

The objects of the issue looks very structured - of the Rs. 49 crores planned to be raised, Rs. 15 crores is to be used for strategic acquisitions. However, the company is yet to identify the companies / businesses to be taken over. Another Rs. 7.2 crores is to be used towards working capital, despite the cash and bank balance of Rs. 5.02 crores, appearing on its books, as on 31^st December 2009.

Moreover, Rs. 6.8 crores and Rs. 10.1 crores is to be used for product R&D and setting-up of 16 marketing offices across the globe, respectively. The full benefits of these will not accrue during FY11 and will get reflected only in FY12 results and onwards. Hence, FY11 will have expanded equity base, but will not be EPS accretive.

The company's IPO has been graded a "2" implying below average fundamentals. For 9 months ended 31^st December 2009, it earned revenue of Rs. 45.9 crores and net profit of Rs. 5.2 crores. EPS for 9 months was at Rs. 4 per share and full year EPS is expected to be Rs. 5.50 per share. At the new revised lower end of the price band of Rs.80, PE multiple works out to 14 times. Similar companies in manufacturing IT networking equipments are presently ruling at PE of around 6 to 8 times. So despite the lower price band being revised, we maintain the view that the company does not have any scale or better margins to deserve even this premium.

As on 31^st December 2009, receivables stood at Rs. 13.6 crores, implying a debtors turnover ratio of just 4.5 times. Its networth as on that day was Rs. 35.9 crores, and with 1.3 crores outstanding shares of Rs. 10 each, the resulting book value per share is Rs. 27.6. The only silver lining in its financials is its debt free status.

The company has over 120 employees, of which 50% are in sales and marketing, and its staff costs for 9 months ended 31^st December 2009 was Rs. 12.5 crores i.e. annual wage bill of Rs. 17 crores or Rs. 14 lakhs per employee - a hardware company paying 28% of its sales as salaries is unheard of! Not to mention the fat pay-check of Rs. 1 crore each, that the two Promoter Directors of the company, draw annually.

Likewise, the company incurred selling and marketing expenses of Rs. 15.8 crores for 9 months ended 31st December 2009, which is equivalent to 34% of its sales for the period. Means, the company spends 34 paisa in a rupee, just on selling and marketing its 'patented product'!

The company also has some operation and regulatory hurdles before it. RBI regulations, restricting the quantum of funds that can be remitted by the company to its US branch office, may act as an impediment to the company's future workings.

On the intellectual property and potential competition front, it has 7 product patents, which are only in the US. It does not have any patents or trademarks in India or any other geography, where it is looking to expand its business, to 40% of sales, over the next 3 years.  

This looks to be a structured IPO, just to raise funds. The fundamentals do not justify the valuations. It remains a clear avoid, even after the price revision.