Zero-debts and healthy cash flows notwithstanding, trading-dominated top line, falling operating margin, disproportionally large equity base, promoters’ negligible cost of holding, unjustifiably high Price-Earnings multiple (as compared to Sensex and Nifty P/E), uncertain market conditions, etc., make the offer least attractive.
|
OFFER AT A GLANCE |
|
|
Name |
Quick Heal Technologies Ltd |
|
Public Offer |
Fresh Issue of Rs 250 cr (77.88 to 80.39 lakh shares) and Offer for Sale of 62.7 lakh shares of Rs 10 each (Rs 195 cr to Rs 201 cr). |
|
Offer % on Total Equity |
20.07% to 20.36% |
|
Offer Price |
Between Rs 311 and Rs 321 |
|
Offer Amount |
Rs 445 cr to Rs 451 cr |
|
Application Quantity |
45 & Multiples of 45 |
|
Listing at |
BSE and NSE |
|
IPO Grade |
Nil |
|
Book Running Lead Managers |
ICICI Securities, Jefferies India & J P Morgan |
|
Registrar |
Link Intime |
|
IPO SCHEDULE |
|
|
Bid/Offer Opens |
February 8, 2016 |
|
Bid/Offer Closes |
February 10, 2016 |
|
Finalisation of Basis of Allotment |
Monday, 15th Feb 2016 |
|
Refunds/Unblocking ASBA Fund |
Tuesday, 16th Feb 2016 |
|
Credit of to Depository account |
Wednesday, 17th Feb 2016 |
|
Trading to commence on or before |
Thursday, 18th Feb 2016 |
The IPO
The present IPO is a combined issue consisting of a fresh issue of Rs 250 cr by the company and an `offer for sale’ of 62,69,558 equity shares Rs 10 each from four shareholders. Whereas the promoter-shareholders Kailash Katkar and Sanjay Katkar are selling 18,40,000 shares each, Sequoia Capital India Investment Holdings III and Sequoia Capital India Investments III, funds controlled by venture capital investor Sequoia Capital who invested in fiscal 2011, are off-loading 25,01,984 shares and 87,574 shares respectively.
The IPO price band has been fixed at Rs 311-321 a share which values the total offer at Rs 445-451 cr. Investors should apply for a minimum of 45 shares and multiples of 45 thereafter. The IPO would constitute 20.07% to 20.36% of the post-issue paid up capital of the company (Rs 70.03 cr to Rs 70.28 cr). The promoters and their associates, who control 87.9% of the present equity (Rs 62.24 cr), would hold 72.6% to 72.9% post-IPO. ICICI Securities, Jefferies India and J P Morgan are acting as book running lead managers to the offer.
|
IPO STRUCTURE |
|||
|
(Shares in crore) |
AT CAP |
AT FLOOR |
% |
|
Fresh Issue |
0.78 |
0.80 |
55.9 |
|
Offer for sale by selling shareholder* |
0.63 |
0.63 |
44.1 |
|
Net Offer for Public |
1.41 |
1.43 |
100.0 |
|
OFFER BREAK-UP |
1.41 |
1.43 |
100.0 |
|
QIB (upto 60% to anchor investors) |
0.69 |
0.71 |
49.7 |
|
Non Institutional |
0.21 |
0.21 |
14.7 |
|
Retail |
0.49 |
0.49 |
34.3 |
|
Employee Reservation |
0.02 |
0.02 |
1.4 |
|
*Selling Shareholder & no. of shares |
6269558 |
6269558 |
100.0 |
|
Kailash Katkar |
1840000 |
1840000 |
29.3 |
|
Sanjay Katkar |
1840000 |
1840000 |
29.3 |
|
Sequoia Capital India Investments-III |
2501984 |
2501984 |
39.9 |
|
Sequoia Capital India Investment Holding III |
87574 |
87574 |
1.4 |
|
(Amount in Cr) |
Post-IPO |
Post-IPO |
Pre-IPO |
|
Equity Capital |
70.03 |
70.28 |
62.24 |
|
Promo Stake (%) |
72.9 |
72.6 |
87.9 |
|
Market Cap |
2248 |
2186 |
|
IPO Object
Of the fresh issue proceeds of Rs 250 cr, the company proposes to spend Rs 111 cr on Advertising and Sales Promotion, Rs 42 cr towards Capital Expenditure on Research & Development and Rs 28 cr on Purchase, Development and Renovation of office premises in Kolkata, Pune and New Delhi. The balance net of issue expense is earmarked for General Corporate Purposes. However, the fund requirements, the deployment of funds and the intended use of the issue proceeds are based on management estimates only and have not been appraised by any bank, financial institution or any other external agency.
Company Background
The Pune-based Quick Heal Technologies Ltd was incorporated in August 1995 as CAT Computer Services Private Ltd. The name was changed in August 2007. The company’s promoters are Katkar brothers, Kailash and Sanjay and their spouses, Anupama and Chhaya. Quick Heal became ‘a certified partner’ of Microsoft in 2008 and in 2010 Sequoia Capital took a stake in the company.
The promoter-CEO Kailash Katkar (49), though just a matriculate, reportedly has experience in sales, marketing, customer service, technical support and administration. Sanjay Katkar (45), promoter-CTO holds a masters degree in computer science. Katkar brothers control 35.91% each while their spouses hold 8.04% each. Sequoia Capital controls 10.05%. The balance (2.05%) is held by employees and others. In the current equity of Rs 62.24 cr, the promoters hold 87.9% which is slated to go down below 73% after the public issue. In ten years between 2005 and 2014, the company has made as many as 5 bonus issues which have brought down the cost of promoters’ holding to just 3 paise per share!
Business Profile
Quick Heal is one of the leading providers of security software products and solutions in India. The company claims to have a market share of over 30% in the retail segment. The company sells its products/solutions through distributors whom they refer as channel partners, who in turn distribute through re-sellers. At the end of December 2015, the company claims to have a network of 19000 retail channel partners, 349 enterprise channel partners, 319 government partners and 944 mobile channel partners. The company is reportedly having 64 sales/marketing offices across 36 cities. It had 1396 employees at the end of December 2015 of which 547 were part of the R&D.
Quick Heal has been granted a sub-licence of a licensed patent under U.S. Patent No. 8,065,728 by NovaShield, Inc by which, the company obtained rights to the NovaShield anti-malware engine which is a signature-less, behaviour-based, real-time anti-malware system designed to detect and stop zero-day malware that try to infect a user’s computer. Quick Heal has also entered into a sales and service agreement in August 2012 with NovaShield pursuant to which the latter has agreed to sell a software development kit, grant licence of intellectual property rights in its software development kit. Quick Heal has also entered into a master development agreement in June 2013 with SP Software Technologies (I) Pvt. Ltd, a company engaged in providing onsite and offshore software development and consultancy services in mobile, system engineering, storage technologies and internet technology space.
Financials
The break-up of the company’s top line clearly indicates that Quick Heal has very little sales from its own products and its operations are dominated largely by trading. The company’s trading turnover grew from Rs 179 cr in fiscal 2012 to Rs 283 cr in fiscal 2015. The company’s sales from its own products were less than Rs 3 cr in last fiscal. The most attractive aspect of Quick Heal is, though trading dominates the company’s top line, the profit margin is quite impressive at above 32% and the company has been generating sizable cash flow from operations in last five fiscals. Another positive feature of Quick Heal is the company is totally debt-free. Nevertheless, one should not overlook the fact that the operating margin, which was as high as 53% in 2012, has shrunk to 32% in 2015. In fact, in the current fiscal, it has dropped below 30%.
|
QUICK HEAL TECHNOLOGIES CONSOLDATED FINANCIALS |
|||||
|
(in lakh) |
Sep-15 |
Mar-15 |
Mar-14 |
Mar-13 |
Mar-12 |
|
Sale of own products |
192 |
259 |
200 |
30 |
0 |
|
Sale of traded products |
14623 |
28326 |
24079 |
20463 |
17899 |
|
Sale of services |
3 |
26 |
5 |
9 |
8 |
|
Other Income |
409 |
822 |
979 |
975 |
568 |
|
Gross Income |
15227 |
29434 |
25263 |
21476 |
18475 |
|
Operating Profit |
4809 |
10003 |
11417 |
11491 |
10135 |
|
Operating Margin % |
29.7 |
32.1 |
43.0 |
51.3 |
53.4 |
|
PRE-TAX PROFIT |
3674 |
7983 |
10336 |
11047 |
9922 |
|
Tax |
1251 |
2602 |
2765 |
3357 |
3104 |
|
Net Profit |
2422 |
5380 |
5838 |
7690 |
6818 |
|
Net operating cash flow |
3411 |
7721 |
6070 |
6766 |
4886 |
|
Equity Cap |
6107 |
6107 |
6107 |
763 |
763 |
|
Share Premium |
0 |
0 |
0 |
3507 |
3507 |
|
Reserves-others |
29473 |
27037 |
27129 |
24227 |
16762 |
|
Dividend % |
0.0 |
75.0 |
75 |
25 |
15 |
|
Dividend Amt |
0 |
4580 |
946 |
191 |
115 |
|
Div Pay-out % |
0.0 |
85.1 |
16.2 |
2.5 |
1.7 |
|
Net Block |
19886 |
18480 |
13722 |
6738 |
4269 |
|
Borrowings |
0 |
0 |
0 |
0 |
0 |
Valuation
Quick Heal, which has accumulated an earned surplus of Rs 295 cr up to September 2015, is asking for a valuation of about Rs 2200 cr. The offer document claims that there is no comparable peer in the listed domain. Though there is no listed peer to compare in security software, Quick Heal cannot be valued at a higher P/E than IT bellwethers Infosys, TCS and Wipro.
Quick Heal’s cap price (Rs 321) discounts its consolidated diluted annualized EPS more than 41 times while the proven market savvy IT heavy weights command a P/E of less than 22x. Also, currently the Sensex P/E is at less than 18x and the Nifty P/E has dropped below 20x. Moreover, the promoters’ cost of holding is a negligible 3 paise and the cost of non-promoter shareholder Sequoia is only Rs 96. Post offer for sale, these shareholders’ cost of holding will be negative. In such circumstances, Quick Heal’s price is unlikely to hold once the lock-in lapses.
Concerns
For a company with a top line of less than Rs 300 cr, an equity capital of over Rs 70 cr is disproportionately large. The company’s own sales are negligible as compared to its trading turnover. Also the profit margin is continuously falling. The company’s EBITDA and net profit have witnessed negative CAGR in last four years. A disturbing aspect of the 20-year old Quick Heal is, the senior executive positions like the financial controller, vice-president sales & marketing, company secretary, etc., have changed in recent years.
Lead Manager’s Track
Quick Heal’s IPO is handled by three investment bankers who have a mixed track record. In last six years ICICI Securities has associated with 24 public issues of which 14 are currently quoting below their offer prices. Though the track record of the recent IPOs is quite satisfactory, the performance of the IPOs brought out by I-Sec in the year 2010 is pathetic. The investment banker lead managed as many as 13 public issues in that year of which as many as 12 are quoting below the investment cost. Of these, Nitesh Estates, Commercial Engineers, Parabolic Drugs, Jaypee Infra, A2Z Infra and Shree Ganesh Jewel are languishing at 75% to 97% discount!
|
Performance of ICICI Securities-Associated IPOs |
||||
|
ISSUER NAME |
IPO |
IPO |
CURNT |
GAIN |
|
|
DATE |
PRICE |
PRICE |
% |
|
Sadbhav Infrastructure |
31-Aug-15 |
103 |
85.50 |
-17 |
|
Manpasand Beverages |
24-Jun-15 |
320 |
458.50 |
43 |
|
PNC Infratech |
8-May-15 |
378 |
503.75 |
33 |
|
VRL Logistics |
15-Apr-15 |
205 |
349.40 |
70 |
|
Shemaroo Enter |
16-Sep-14 |
170 |
284.10 |
67 |
|
Wonderla Holidays |
21-Apr-14 |
125 |
379.50 |
204 |
|
Bharti Infratel |
11-Dec-12 |
220 |
366.00 |
66 |
|
Power Finance Corp |
10-May-11 |
203 |
177.05 |
-13 |
|
Future Consumer |
25-Apr-11 |
6 |
21.45 |
258 |
|
Muthoot Finance |
18-Apr-11 |
175 |
184.35 |
5 |
|
PTC India Financial |
16-Mar-11 |
28 |
34.20 |
22 |
|
Punjab & Sind Bank |
13-Dec-10 |
120 |
34.05 |
-72 |
|
A2Z Infra Engineering |
8-Dec-10 |
400 |
22.25 |
-94 |
|
Shipping Corporation |
30-Nov-10 |
140 |
83.10 |
-41 |
|
Claris Lifesciences |
24-Nov-10 |
228 |
174.80 |
-23 |
|
Power Grid Corporat |
9-Nov-10 |
90 |
145.30 |
61 |
|
Commercial Engineers |
30-Sep-10 |
127 |
20.35 |
-84 |
|
Engineers India |
27-Jul-10 |
290 |
179.85 |
-38 |
|
Parabolic Drugs |
14-Jun-10 |
75 |
7.59 |
-90 |
|
Jaypee Infra |
29-Apr-10 |
102 |
9.95 |
-90 |
|
Nitesh Estates |
23-Apr-10 |
54 |
12.81 |
-76 |
|
Shree Ganesh Jewel |
19-Mar-10 |
260 |
7.95 |
-97 |
|
Rural Electrification |
19-Feb-10 |
203 |
190.95 |
-6 |
|
NTPC |
3-Feb-10 |
201 |
124.70 |
-38 |
Jefferies India has handled just two IPOs till date. Incidentally both were in 2015 and both are currently quoting at a premium.
|
Performance of Jefferies India-Associated IPOs |
||||
|
ISSUER NAME |
IPO |
IPO |
CURNT |
GAIN |
|
|
DATE |
PRICE |
PRICE |
% |
|
Narayana Hrudayalaya |
17-Dec-15 |
250 |
318.60 |
27 |
|
Syngene International |
27-Jul-15 |
250 |
399.65 |
60 |
As regards J.P. Morgan, the investment banker has associated with 9 IPOs in last six years of which 5 are quoting above the offer price. Whereas Persistent Systems which was floated public in March 2010 is currently commanding 315% gain over the offer price, PSUs MOIL and NTPC that entered the market same year have inflicted a capital loss of 46% and 38% respectively.
|
Performance of J.P.Morgan India-Associated IPOs |
||||
|
ISSUER NAME |
IPO |
IPO |
CURNT |
GAIN |
|
|
DATE |
PRICE |
PRICE |
% |
|
Alkem Labs |
8-Dec-15 |
1050 |
1336.50 |
27 |
|
Interglobe Aviation |
27-Oct-15 |
765 |
837.25 |
9 |
|
Bharti Infratel |
11-Dec-12 |
220 |
366.00 |
66 |
|
MOIL |
26-Nov-10 |
375 |
200.85 |
-46 |
|
Power Grid Corp |
9-Nov-10 |
90 |
145.30 |
61 |
|
Prestige Estates |
12-Oct-10 |
183 |
173.10 |
-5 |
|
Oberoi Realty |
6-Oct-10 |
260 |
237.40 |
-9 |
|
Persistent Systems |
17-Mar-10 |
155 |
642.75 |
315 |
|
NTPC |
3-Feb-10 |
201 |
124.70 |
-38 |