Taksheel Solutions is entering the capital market on 29^th September 2011 with a fresh issue of 55 lakh equity shares of Rs.10 each, in the price band of Rs. 130 to Rs. 150 per share, aiming to raise Rs. 72-83 crore. The issue, comprising about 25.17% of the company's post issue paid-up capital, closes on 4^th October.

PNB Investment Services, wholly owned subsidiary of Punjab National Bank, is the BRLM to the issue and this seems to be its maiden IPO mandate, to hit the street. Maybe, compromise on the quality and aggressive pricing are the features of this IPO.

September rush seems to have hit the IPO market again this year, similar to last year, with 9 IPOs already hitting the market and another one scheduled to open on 30^th September. Since SEBI guidelines require updating IPO prospectus with audited statements, not more than 6 months old from issue opening date, company has presented financials upto 31^st March 2011 and opening the issue on 29^th September to avoid re-audit and added compliance.

Hyderabad-based Taksheel Solutions offers IT products and services to financial services (such as wealth management software) and telecom companies in the US. Founded during the dot-com boom of 1999, company clocked revenues of Rs. 147 crore in FY11, which was a 3 fold rise, compared to FY10's revenues of Rs. 50 crore. While debtors as of 31^st March 2011 stood at Rs. 36 crore (representing 3 months of sales), outstanding debtors in the previous years have been exceptionally high at Rs. 43 crore (representing a whopping over 10 months sales) as of 31^st March 2010. Even as of 31^st March 2009, debtors of Rs. 30 crore and debtor days of nearly 11 months for FY 09's 33 crore sales, leads to suspicion.

At net margins of 18.6%, company earned PAT of Rs. 27.4 crore, due to zero taxes as company operates in an SEZ unit attracting nil tax liability. However, from current year onwards i.e. from FY 12, MAT @ 18.5% will be applicable to company, which will impact profitability significantly.

As of 31^st March 2011, company had net worth of Rs. 91 crore, with total debt of just 8.6 crore and cash balance of Rs. 6 crore. Promoter shareholding will decline from 63.31% currently to 47.37% post-IPO. Company is obliged to buy-back 10 lakh equity shares at Rs. 170 per share from an investor, holding 6.12% of pre-issue capital. Also, if the company does not buy-back and hence shares are sold to a third party, company has guaranteed to pay the difference between Rs. 170 per share and sale price. This can turn out to be a material liability, if it fructifies in the future. In the past, company has also faced penalty from RBI for non-compliance of FEMA regulations on multiple counts, which increases the discomfort on the stock.

Objects of the issue look structured as company plans to use Rs 22 crore for acquiring firms in a similar line of business, to set up 2 software development centres at SEZs in Hyderabad and Warangal for aggregate of Rs. 17.8 crore and working capital needs of Rs. 12.8 crore. The acquisition target has not been finalised and just a chest is created for inorganic growth opportunities. Since the company has net worth of Rs.91 crore, which will increase to over Rs. 160 crore, post-IPO, it can tap the debt route to fund acquisitions, as it had net debt of only Rs. 2.5 crore, as of last balance sheet date.

At upper end of price band of Rs.150 per share, offer to public is being made at PE multiple of 9.1 times, which is quite stretched, considering that mid-segment IT companies are currently trading in mid-single digit PEs. This company being a smaller player, having registered a respectable topline only in the previous financial year, cannot deserve such a high PE multiple. Expected market cap of Rs. 328 crore (on listing at Rs. 150) looks stretched.   

Given the company's presence in the BFSI business vertical and with geographic presence in the US, and when fear of a global slowdown looms large on the bigwigs of Indian IT sector, small player like Taksheel is bound to be impacted adversely by a larger degree. Also, the taxability of profits due to MAT applicability is a big deterrent.

We recommend an avoid to the issue!