Taksheel Solutions - Too Fast Too Soon

Taksheel Solutions (Taksheel) is coming out with an IPO of 55 lakh shares, and expects to raise around Rs 77 crore from it. The price band at which the issue is likely to hit the market works out to Rs 126-140 per share which would result in a market cap of Rs 275-305 crore after the issue. Of these funds, a total of Rs 17.81 crore would be used to set up development centres at Hyderabad and Warangal, while Rs 22 crore and Rs 12.80 crore will be spent on acquisitions and financing incremental work-ing capital respectively. The balance would go towards general corporate purposes.

It is worth noting that Taksheel Solutions’s company secretary as well as the lead managers, PNB Investment Services, declined to share the latest DRHP, as it is filed with the ROC for approval. However, we are going ahead with inputs from a CARE Ratings report on Taksheel, which does have the latest numbers. According to the company secretary, these numbers have been provided to them on a confidential basis.

Taksheel is an IT solutions company, and derives its revenues mainly from application services (82 per cent of total revenues), data warehousing and business intelligence (nine per cent) and offshore outsourcing (nine per cent). Through these, Taksheel caters to the wealth management and telecom segments. In the wealth management segment, the company pro-vides customised solutions to its clients through Service Oriented Architecture (SOA), while in telecom, its product portfolio includes enterprise IP telephony, unified communication systems, wireless VOIP solutions, video conferencing and so on.

Though the issue objectives show a lot of promise, there are certain concerns that certainly don’t go in favour of Taksheel. First and foremost is the valuation. At FY11 profits of Rs 27.42 crore and fully diluted capital of Rs 2.18 crore, the scrip is available at PE of 10-11x. This is quite steep when compared to its peers such as Aurion Pro and Nucleus Software Exports, which are available at a mere 4x, making Taksheel a very expensive bet.

Taksheel derives its revenues from a single geography, i.e. the US, where 10 clients contributed 85 per cent to its total sales in FY11. In an environment where the US is facing the possibility of a double dip recession, anti-out-sourcing sentiment is already brewing. In such a situation, Taksheel may be severely impacted even if a handful of its top clients cut down on their IT spend altogether.

What also increases the risk is its low employee base of a mere 40 employees as of FY11, which increased from 38 in December 2010. This is quite small for an IT company, when other players recruit briskly and even have a bench strength for any anticipated new projects. In fact, the CARE report mentions that Taksheel actually outsources all onsite jobs to third parties.

That apart, Taksheel prefers to grow more inorganically than organically, and three of its major segments, namely wealth management and IT solutions, data warehousing and business intelligence and telecom software products, were acquired in 2005, 2007 and 2009 respectively. In fact, it has reserved a massive Rs 22 crore for future acquisitions. Thus, it is evident that Taksheel is trying to grow too fast too soon, which increases the risk further, in case these acquisitions fail to generate expected benefits in the future.

That apart, there were also certain corporate governance issues in the past, where Taksheel failed to comply with certain mandatory requirements under FEMA regulations. In certain cases, the RBI has levied penalties and Taksheel has complied with the same, while response is awaited on others. This certainly lowers our comfort level with the company. Thus, with the concerns mentioned above it is better to stay away from this IPO.