Avoid Vishal Information IPO: India Capital Markets

India Capital Markets has come out with a report on Vishal Information Technologies' IPO. It has recommended investors to ignore the issue.

The issue has opened for subscription with its initial public offering (IPO) of 2.79 million equity shares of face value Rs 10 each. The issue will close on July 24, 2008. The price band has been fixed at Rs 140-150 per equity share.

India Capital Markets' report on Vishal Information Technologies' IPO:

Given the nature of business, we believe that the entry barrier in the segment is very low. Moreover the work of digitizing out of copyright books can be done by any players in the data conversion business. Since this is an established market, overseas we believe there would be many other experienced players in this line of business, overseas. VITL is still to prove its ability in the POD segment.

The projects executed by the company are mainly for data conversion/ digitization which take around 6 months on an average for completion. It takes around 6-9 months for VITL to receive the payments from the date of submission of invoices. The average debtor days for FY07 & FY08 are 226 & 242 days, respectively.

VITL derives significant portion of its revenue from very limited clients with top 3 contributing 56% of total revenue. Its largest three clients – UK based client, European client & American client contributing 21%, 19% and 16% respectively in FY08. Management expects this trend to continue, going forward. Any slow down from volume of business from any of these clients can have significant impact on its financial performance.

Valuation:

Globally, digital publishing is a USD 430 billion industry. Out of the given industry, the addressable market for VITL is 10- 15% which works up to USD 43 -65 bn., which is a sizable market. Given, the top line performance of the company along with decent margins, explains the delivery expertise of the company. However given, the nature & size of the business, we believe there could be many other players in its serving segment. With presence of established players in this segment, VITL will have to take on these big players for expanding its reach, which seriously questions its scalability. Moreover, “out of copyright” books can be digitized, by any players in the digitization segment.

Though the financials of the company is sound, there’s nothing unique about the company which can give us the confidence to expect consistent flow of business. The issue is priced on lower & upper price band of Rs 140 & Rs 150, at a P/E multiple of 12.35 & 13.23 at diluted FY08 earnings. Based on the facts in RHP and the given economic & market conditions, we recommend to ignore the issue.

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