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IPO Analysis
Four Soft Limited - Recommendation: BUY (HIGH RISK)
Background & Business
Issue Details
Issue price Rs 25 (premium of Rs 20)
Issue size 79.5 lakh shares
Face value Rs 5 each
Issue opens February 16, 2004
Issue closes February 23, 2003
Minimum Application 200 shares
Minimum payable Rs 2000
Lead managers UTI Securities, Centrum Finance
Registrar Karvy Limited

Financial Snapshot

(Rs crore) FY2001 FY2002 FY2003 FY2004
12 mths 12 mths 12 mths 9 mths
Net Revenues
2.0
3.1
7.3
10.4
Total Expenditure
1.8
2.9
4.1
4.4
Operating profits
0.2
0.2
3.2
6.0
Other Income
0.1
0.1
0.0
0.1
Depreciation
0.2
0.2
0.2
0.2
PBT
0.1
0.1
3.0
5.9
Tax
0.0
0.0
0.1
0.3
Net Profit
0.1
0.1
2.9
5.6
Equity Capital
3.6
4.4
4.7
11.9
EPS(ann in Rs)
0.2
0.2
6.1
3.1
Margins(%)
OPM
10.7%
5.8%
44.2%
57.4%
NPM
4.4%
2.3%
39.2%
53.1%

Past performance

FSL turned profitable at the net level in the first full year of operations itself. It posted net profit of Rs 0.09 lakh on the back of revenues of Rs 2 cr during the fiscal 2001. Thereafter, the company has shown consistent growth reporting revenues and net profits of Rs 10.5 cr and Rs 5.6 cr respectively, for the first nine month ended December 2003.
Valuations

FSL is one among the whole lot of small-sized domestic companies trying to make it big in the software products business globally. The company has made a significant stride in terms of developing products, acquiring customers in various geographies and becoming profitable right from the first full year of its operations. But notwithstanding the distinct positives like deep domain knowledge and niche area of operations, FSL is long way from establishing itself in the highly competitive global markets. Moreover, the company might not be able to show consistent growth in its earnings in the next couple of years as it will be aggressively investing in product development and building up its development facilities and marketing infrastructure.

At the offer price of Rs 25 the scrip trades at 10.4x its nine-month FY04 annualised earnings on expanded equity base of Rs 15.9 cr. Though the issue appears to be priced fairly, the uncertainty related to the success of products and ability to scale up its operations make it a risky proposition. Investors with high-risk appetite could look at the issue for some listing gains.

Hyderabad-based Four Soft Limited (FSL), promoted by a technocrat Palem Srikanth, was established as Four Soft Private Ltd in December 1999. Right from the beginning, the company has focused on building enterprise software/solutions in supply chain management using advanced web technologies.

Currently, FSL has operations in Europe, Asia-Pacific and North America, and is in the process of setting up branch/marketing offices in these regions. It had total staff strength of 140 employees as on end of December 2003.
Product details
It launched the first software product eSupply SP in 2001 and the product eSupply EP is under implementation and expected to go live in September 2004. Both these products are web-centric enterprise applications for Supply Chain Process Management and are based on the J2EE technology. The company aims to address around $1 bln potential market through its existing products. The company faces stiff competition from large supply chain management players like SAP, i2 Technologies etc in this segment.

FSL already has bagged orders from nine customers for its first product supply SP, which is focused at companies providing third party logistics and multi-nodal transportation services. For its supply EP product (targeting companies with large owned or outsourced distribution network), the company has signed its first client recently. Revenues are generated from one-time licensee fee payments and customisation of products. This apart, the company will have a recurring revenues stream by way of providing after sales support services to its existing clients.
Issue objective

FSL plans to raise Rs 19.87 cr through fresh issue of 79.5 lakh shares at Rs 25 per share (premium of Rs 20 per share). Subsequent to the issue, the promoters (and associates) holding will decline from 67.7% to 50.75% of the post issue equity base of Rs 15.9 cr. Existing investors such as UTI Venture Fund (16.4% of pre-issue equity) and APIDC Venture Capital Fund (2.1% of pre issue equity) have decided to remain invested in FSL and not make an offer for sale of their holding in the public issue.

The primary objective of the issue is to raise capital for product development, fund expansion of existing development facilities and build international marketing infrastructure. FSL management also plans to utilise part of the proceeds to grow inorganically. It expects to make an acquisition in the first half of the next fiscal. Apart from Rs 19.87 cr from public offer, the company plans to utilise Rs 7 cr raised from venture funds and Rs 6 cr of internal accruals to fund its product development and expansion plans.
Concerns

Investment phase: FSL is still in investment phase, where the management will have to spend aggressively in product development and building infrastructure, especially marketing network. According to offer document, the management plans to spend Rs 18.7 cr on building marketing network in FY05 alone. This is amounts to almost entire (94%) proceeds from public offer and is around 35-40% higher than its estimated total turnover in the current fiscal.

Inorganic strategy: One of the primary objectives of raising funds is to grow through acquisitions. It has earmarked Rs 6 cr cash (in addition the company is open to stock swap deals) for acquiring a product-based company in the logistics domain. This certainly is a good strategy to quickly ramp up its size of operations and enhance the product portfolio. But acquisitions normally tend to put pressure on profitability in the short term and the impact is expected to be more prominent and visible in case of FSL given its current scale of operations.
  Gaurav Dua
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