Quick Heal Tech

By Geetanjali Kedia

Quick Heal Technologies is entering the primary market on Monday 8^th February 2016, to raise Rs. 250 crore, via a fresh issue of equity shares of Rs. 10 each and an offer for sale (OFS) of up to 62.7 lakh equity shares, by PE investor Sequoia Capital (60% of OFS) and promoter, both in the price band of Rs. 311 to Rs. 321 per share. The total fund raising aggregates to Rs. 451 crore, at the upper end of the price band, of which, OFS portion is Rs. 201 crore. Representing 20.07% of the post issue paid-up capital at the upper end, issue closes on Wednesday 10^th February.

Quick Heal Technologies sells captively developed anti-virus computer software under Quick Heal (for retail) and Seqrite (for SMBs and enterprises) brands, with retail sales accounting for ~87% of revenues. As of 31-12-15, it has 71 lakh active licences installed across 80 countries. However, international presence is very limited, as 97% revenues is derived from India. In addition, company has 11 lakh active licences for mobiles, sold under Fonetastic Free brand, which is a freemium product.

Over the past few years, company’s margins have been on a steady decline. For FY15, although consolidated revenue from operations rose 18% YoY to Rs. 286 crore, EBITDA increased only 3% to Rs. 100 crore, on account of higher R&D spends (up to Rs. 46 crore, from Rs. 31 crore in FY14), shrinking FY15 EBITDA margin to 35.0%, from 39.8% in FY14 and from 56.1% in FY13. Near doubling of depreciation to Rs. 20 crore in FY15, from Rs. 11 crore in FY14, on account of increased tangible fixed assets (note that company has not provided fixed assets schedule in the RHP), reduced net profit by 8% YoY in FY15 to Rs. 54 crore, contracting net margin to 18.8% in FY15, from 24.0% in FY14 and 37.5% in FY13.

On equity of Rs. 61.07 crore (expanded due to 7:1 bonus in Feb 2014), EPS for FY15 is at Rs. 8.69. Of this, FY15 dividend of Rs. 7.50 per share has been paid during H1FY16, resulting in cash outflow of Rs. 49 crore, including dividend distribution tax. For FY14, dividend outgo was much lower at Rs. 17 crore. If company needs funds for growth (which explains the Rs. 250 crore fresh issue), doesn’t financial acumen refrain such a large dividend outgo? Cash and equivalents stand reduced from Rs. 142 crore, as of 31-3-15, to Rs. 106 crore, as of 30-9-15, on account of this large dividend outgo, before the IPO. 

For H1FY16, consolidated revenue from operations stood at Rs. 148 crore, while EBITDA margin declined further to 32.5% on EBITDA of Rs. 48 crore. On net margin of 16.4%, net profit was at Rs. 24 crore for the first half of the year, leading to an EPS of Rs. 3.91.

As of 30-9-15, net worth stood at Rs. 356 crore, while company remains debt-free with cash and equivalents of Rs. 106 crore. Current equity has expanded to Rs. 62.24 (from Rs. 61.07 as of 30-9-15) on account of exercise of ESOPs. Of this, promoter holding is at 87.90%, while 10.05% is held by Sequoia Capital, which will reduce to 72.87% and 5.23% respectively post IPO.

While company is cash rich, its treasury management seems to be on the poor side, yielding and average of less than 6% pre-tax return on the surplus cash, as indicated below.

*closing at year-end

Objects of issue include advertising and sales promotion of Rs. 111 crore (Rs. 37 crore each in FY17, 18 and 19), capex on R&D worth Rs. 42 crore and purchase / renovation of office premises for Rs. 28 crore. Renovation of office premises through IPO proceeds does not seem convincing enough, as equity is the most expensive form of capital. Other two objects can be easily funded via cash on hand (over Rs. 100 crore) and internal accruals (annual cash profit of over Rs. 70 crore), in addition to the option of bank financing always being open, as company has zero debt. Thus, Rs. 250 crore fresh issue is not resounding.

At the upper end of the price band of Rs. 321, company’s market cap will be Rs. 2,248 crore with enterprise value (EV) of Rs. 2,141 crore. This leads to a PE multiple of approximately 41 times and 40 times (on expanded equity) for FY16 and FY17 respectively. EV/EBITDA multiple at 22 times and 20 times for FY16 and FY17 respectively is also on the higher side. While there are no direct listed peers, software and IT services sector is ruling at one-third to half these multiples. 

While company was to consider retail discount, as stated in the RHP dated as recent as 29 Jan 2016, none has been announced, which is disappointing. Moreover, of late, market seems to be losing fancy for the so called ‘niches’ or ‘first-movers’ of the respective industries. Just Dial, Jubilant Foodworks, Kaya, Interglobe Aviation are some name which come to mind here, which have seen share prices taking a sharp beating, as the euphoria surrounding them seems to be dying out.

While Quick Heal has a good business, declining margins are a big worry, in the highly competitive industry. Unconvincing objects of issue coupled with high valuations do not help any bit.

Thus, given the fragile market conditions, IPO of Quick Heal Technologies can be given a miss.

Disclosure: No interest.