In the BFSI segment, the company does testing in core banking/retail banking (for products like finacle, Banc 24, Flexcube, FinnOne etc.), treasury (Kondor+, Kastle, Urbis), Investment Banking (MIDAS), retail lending/loans/mortgages (Pan Credit, LSI-NT, Foresee, Cheque mate etc.), credit cards (VisionPLUS, TS2, Prime), payment system (STS – CWS), corporate banking (Flexcude), Insurance (GENIUS, METFACS2, PREMIA), private banking (ORBI), CRM (Siebel) and Campaign management (ClarityQ).

As of March 31, 2009, the company has 34 active clients. The company added 17 clients in FY2009. Of the revenues for FY2009, 15% was contributed by new clients. The top 10 clients contributed 92.66% of the revenues for FY2009 down from 94.85% in FY2008.

The share of onsite to the operating revenues has increased to 62.98% from 48.59% in FY2008. The management has indicated a target level of 55%. Most of the revenues are generated primarily on the time and material basis about 88% down from 93% in FY2008. The level over the last 4 years is 87-93%.

Within the BFSI segment, for FY2009, banking contributed 43% up from 29%, credit cards segment contributed 37% down from 52%, capital market segment contributed 10% up from 8%, Insurance contributed 8% up from 6% and others contributed 5% up from 2%.

As of March 31, 2009, the headcount was 538 employees down from 582 at end FY2008. The utilization for FY2009 was 59% down from 65% in FY2008. As of August 2009, the employee strength has further come down to 523 employees of which testing staff is 383, domain experts 72 employees, marketing are 25 employees and foundation & support staff are at 43 employees.

In terms of geographies, Europe contributed 53.7% of the revenues down from 58.2% in FY2008. The share of Europe has come down gradually from a high of 76.9% in FY2006. Singapore & Middle East contributed 26.7% up from 17.1% in FY2008 and 5.4% in FY2005. Australia & US contributed 16.1% against 16.8% in FY2008 and 8% in FY2005. India contributed 3.5% of the revenues down from 8% in FY2008.

The company had received investment of about Rs 5.13 crore from Euro Indo Investments & its promoter (Vinod Ganjoor) in 2000-2001. The fund has ended its life and has to repay to its investors hence selling off its shares. The fund is offering 90% of its stake for sale in the public issue. This accounts for about 63% of the public issue. The balance 37% is being raised to fund setting up new testing centre at MEPZ-SEZ adding 400 seats to be completed by March 31, 2011 at a capex of Rs 16.09 crore.

Strengths

• The revenues of the company have reported CAGR of 43.5% in rupee terms and 42.7% in US dollar terms (assuming average INR/US$) over the period FY2005 - FY2009. However, the growth was lower at 8.7% (in US$ terms) in FY2009 over FY2008 impacted by the global slowdown.

• The company has close to 10 years experience in financial domain. Within the BFSI vertical, the company has opportunity in the replacement of legacy systems/applications with off-the-shelf products, addition of new banking channels such as such as Mobile/e-Banking, innovation in cards markets such as Contact less cards, Chip and Pin – Smart cards (EMV), industry initiatives such as Single Euro Payment Area (SEPA), growth in Middle Eastern region especially in Islamic Banking, opportunities to mine existing accounts by expanding width and depth of engagements.

Weaknesses

• The company has high dependence on few clients with more than 90% of the revenues coming from top 10 clients. Top 10 clients contributed 92.66% in FY2009, 94.85% in FY2008, 96.99% in FY2007, 97.64% in FY2006 and 94.64% in FY2005. Top client contribution for FY2009 was 26%.

• The services of the company are part of the discretionary spend of any client. There has been a slump in the discretionary spend by clients all across verticals. While it seems to have bottomed out, how fast the discretionary spend will pick up is not clear.

• The company is focused on only one vertical i.e. BFSI. The vertical has seen a major impact due to the challenging economic environment and will remain very sensitive to fluid global economic environment.

Valuation

The Company has reduced the offer price. At the new price band of Rs 115 – 125, on the consolidated FY09 EPS of Rs 14.4 on post IPO equity, PE works out to 8 – 8.7 times. The company has cash on books of Rs 26 per share for FY2009 on post issue share capital. Excluding this cash, the P/E comes down to 6.1 – 6.8 times. Earlier the offer price was Rs 120 – 130.

Considering the cash on books, trend of operating cash flow and the capex plan, the IPO seems to be mainly to give an exit route to the selling share holders.

Of the small software companies focused on BFSI space, Nucleus Software, a product company is trading at TTM PE of 11.1 times (pre cash) and 7.2 times (post cash) and Saksoft, a testing services cum product company (similar sized company in terms of revenues) is trading at TTM PE of 5.1 times. Nucleus Software would command a higher PE as it is product centric as against Thinksoft which is a services company.