Acropetal Technologies - Avoid

Acropetal Technologies (ATL), is a Banglore-based 100 per cent Export Oriented Unit (EOU) software service company. It is entering the capital market to raise Rs 170 crore. The price band is fixed at Rs 88-90. At the lower price band it will issue approximately 1.93 crore equity shares and at the higher price band it will issue 1.89 crore equity shares. The total dilution that the company is looking for is around 48 per cent of post-equity expansion. The money raised will be primarily be used for acquisitions, setting up of a software development centre and part repayment of term loans.

The company is a mid-sized IT Company that is predominantly present in two areas; EDS (engineering design services) and IT Services (ITS). IT services constitute 62 per cent of its total turnover and rest 38 per cent is shared by EDS. Within ITS, the healthcare division constitutes 33 per cent of the total ITS revenue. In terms of geographical diversification almost 65 per cent of the revenue is generated from the US, 26 per cent from the Middle East and the rest from other parts of the world. ATL has grown at the rate of 37 per cent CAGR in topline and bottomline both in the last three years. The presence of the company in niche markets has helped it to tide over the last recession in a better way and it grew by 52 per cent during FY10 on yearly basis. Going forward with the pick up in US economy we feel that the company can maintain its growth rate albeit with some moderation due to a higher base. For nine months ending December 2010, the company posted a profit of Rs 18.13 crore against sales of Rs 106.37 crore. After annualizing its nine month profit and dividing it by expanded equity we get an EPS of Rs 9.7 on the higher price band. This discounts the current offering at 9.2 times. When we compare it with other listed player of similar size like Nucleus Software Exports which is trading at 11 times of its FY11E earnings this looks reasonably priced and that the offering is not coming at any deep discount.  If we compare market cap to sales, ATL is trading at 1.74 times compared to 1.1 times of Nucleus Software Exports. The reason for this high market cap to sales may be attributed to a high growth rate demonstrated by ATL in the last few years. However there are certain points that make the offer unattractive. First is the debtor collection period of 109 days at the end of FY10, which is almost double of the industry average of 60-80 days. The second unusual thing about ATL is its debt of Rs 130 crore, which for other IT companies remains zero.

Therefore, though the offering is slightly attractive to its current listed peers the risk of a highly leveraged balance sheet somewhat offsets that advantage. Hence we advise our readers to skip the issue.