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Software IPOs digging their own grave - Views on News from Equitymaster
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  • Apr 19, 2000

    Software IPOs digging their own grave

    The domestic Initial Public Offering (IPO) market in the technology segment is loosing its face and does not look as attractive as extraordinary profits made by them earlier are unlikely to be sustained. Majority of technology IPO's, which were listed at huge premiums have been battered down. Though they currently command a premium over the offer price, the premiums have come down drastically since their listing.

    The surge in share prices on the NASDAQ did contribute to a surge in the Indian bourses with technology stocks rising unabated. Indian companies may try to deny any correlation with the NASDAQ, as they argue that only 40% of NASDAQ's market capitalisation is contributed by this segment the rest being contributed by other sectors. The fact remains that technology stocks are over-valued and this unreasonable rise in stock prices needed to be checked and the NASDAQ acted as a trigger.

    Despite the premiums coming down many technology companies are keen to tap the IPO markets before the software fever subsides. Hence this has lead to poor quality issues tapping the primary markets. In many cases the companies have no past track record, the promoters do not have any past relevant experience, companies are being deliberately set up to tap the primary market, issues being done at par, do not have concrete marketing plans, and the project has not been appraised by any financial institution. As per a newspaper report 100 information technology companies plan to raise Rs 50 bn from the primary market in this financial year.

    They are taking advantage of the revised SEBI norms which permits companies with no track record of distributable profits for the past three years and net worth of less than Rs 10 m for the past 2 years to float an IPO. However these companies need to get their project appraised by a public financial institution or a scheduled commercial bank and the latter funds 10% of the project through equity and term loans. Hence companies with hardly any track record are taking advantage of this.

    The following IPO's which came out recently have seen a decline in the premiums on current prices as compared to their listing prices:

    Company Date Listed Offer
    Price on
    Apr 17, 2000
    % Premium listed
    price/Offer Price
    % Gain/Loss
    Current Price/
    Offer Price
    Geometric Software Solutions 29-Mar-00 300.0 910.0 600.3 203.3% 100.1%
    Visesh Infosystems 24-Feb-00 50.0 171.0 93.6 242.0% 87.2%
    Integrated Hitech 3-Feb-00 10.0 32.0 16.5 220.0% 65.0%
    Kaashyap Radiant Systems 18-Jan-00 10.0 120.0 103.8 1100.0% 937.5%
    Melstar Information 3-Sep-00 72.0 285.0 167.0 295.8% 131.9%
    Amex Information Tech 22-Mar-00 55.0 244.0 146.7 343.6% 166.7%
    SQL Star International 15-Dec-99 55.0 221.0 108.2 301.8% 96.7%
    KPIT Systems 15-Dec-99 90.0 385.0 153.4 327.8% 70.4%
    Zenith Infotech 14-Feb-00 110.0 400.0 108.0 263.6% -1.8%
    Software Tech Group 2-Jul-00 66.0 300.0 115.9 354.5% 75.6%
    Kale Consultants 15-Dec-99 120.0 581.5 212.5 384.6% 77.1%
    TV-18 16-Feb-00 180.0 1,950.0 822.0 983.3% 356.7%
    Cybermate Infosystems 15-Dec-99 10.0 251.0 140.5 2410.0% 1305.0%

    This drop in premium will in future affect many technology companies planning to come out with IPOs as the market may not receive them with open arms. On the positive side it will keep investors away from the bad quality issues which aim to take advantage of the boom in the software market.

    Also internet companies planning to come out with IPOs at high premiums may not succeed unless they have a sustainable revenue model. Earlier for such dot.com companies investors were only focused on revenues and not profits. This has however changed and investors now prefer companies which can deliver profits.

    Another factor to be faced by these technology companies planning IPOs would be exodus of their personnel. With ESOP valuations not looking so attractive anymore employees may look to other stable industries for career options and this would affect the operations of the technology companies which depend heavily on manpower.



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