New Issues Analysis(IPO) » GSS AMERICA INFOTECH

Peers are much stronger and cheap

GSS America Infotech is entering the capital market on 11th February 08, with a public issue of 34.97 lakh equity shares of Rs.10 each, in the band of Rs.400 to Rs.440 per share. At the upper band, issue would mobilize close to Rs.154 crores and Rs.140 crores at the lower band. The company is offering I.T. Solutions in e-business, I.T. Consulting, I.T. Infrastructure Management Services and Enterprise Integration Application. The present scale of the company is quite low with 717 employees as at 31st December 07 with total area of 36,718 sq. ft. at 4 development facilities, located at 4 different locations, with 2 in Hyderabad and 2 in Chicago. FY 07 performance has been good with topline at Rs.165 crores and PAT of Rs.37.10 crores, on equity of Rs.9.80 crores, resulting in an EPS of Rs.37.85. First 9 months of FY 08, had a topline of Rs.205 crores with PAT of Rs.43.76 crores which results into an annualized EPS of Rs.60. This means, shares are issued at a PE multiple of 7.33, based on FY 08 earnings, at the upper band. One may find the issue quite attractive, as it is being issued at a PE multiple of 7.33 times, based on FY 08 earnings. However, Zylog Systems, had reported topline of Rs.162 crores and PAT of Rs.23.44 crores, resulting into an EPS of Rs.14.25 for Dec. 07 quarter. September 07 quarter had an EPS of Rs.12.76. FY 08 EPS is likely to be above Rs.50 and share is ruling close to Rs.300 per share, thus ruling at a PE multiple of 6 times. This company has recently commenced its Offshore Development Centre, near Chennai, of about 80,000 sq. ft. with 800 seater. This would vastly improve the financial performance for FY 09. Prithvi Information, a similar company had posted a topline of Rs.295 crores and PAT of Rs.28.40 crores for December 07 quarter, giving an EPS of Rs.15.70. Based on 9 months results, FY 08 EPS is likely to be close to Rs.58 and share is ruling at Rs.325, resulting in a PE multiple of 5.60 times. I Gate Global had topline of Rs.210 crores and PAT of Rs.28.80 crores, resulting into an EPS of Rs.9.09 for December 07 quarter. This company, bought back all the shares at Rs.410 per share and shares have been delisted. Prior to that, even this company was ruling at a PE multiple of 6 times. The company is now setting up a Global Delivery Centre of 1 lakh sq. ft. at Hyderabad, which would be fully operational only by March 2010, though RHP states it to start in December 09. This is estimated to cost Rs.66 crores. Rs.35 crores has been estimated for working capital (Rs.25 crores) and overseas offices. All these are estimated to cost Rs.100 crores, while Rs.140 crores would get mobilized at the lower band of Rs.400 per share. IL&FS Trust had subscribed to company’s equity in February 07 at Rs.239.50 while other investor have subscribed equity at Rs.263 in February 07. Considering this, the issue at Rs.400, at the lower band looks reasonable. The growth of the company has been fabulous in FY 07 and FY 08 and the same may continue in FY 09 as well. But concern remains on FY 10 performance, as Global Delivery Centre would start in March 10, thus contributing in FY 11 only. If we look at the EPS of Rs.60 for FY 08, this results into a PE multiple of close to 7 times, at Rs.400 and about 7.50 times at Rs.440. On expanded equity base of Rs.13.30 crores, EPS falls to Rs.45, which results in a PE multiple of 9 to 10 times. In isolation, the issue may look good but considering availability of Prithvi and Zylog, at much cheaper valuations, one need to give a thought to it. Zylog having gone public in July 07, and having issued shares at Rs.350, still ruling below offer price. In this background, better to go for Zylog and Prithvi, instead of this issue, which is expensive even at the lower band of Rs.400.