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June 4, 2010Fatpipe Networks a Chennai based company is planning to come up with ~$11 million IPO on the 7th of June,2010.The DRHP filed with SEBI reveals that it might be an interesting small cap company to buy . Given the flood of low quality junk IPOs hitting the market , Fatpipe Networks looks good on a high level review and analysis .There are not a lot of genuine Technology companies in India one can buy,because companies like Infosys,Wipro etc fall more into the category of Outsourcing companies like WNS rather than Technology companies like Google. However risks are quite large in investing in any Indian Small Cap as transparency is not a strong point of India’s corporate world.Investing in the Indian markets is hazardous for retail investors looking to build a portfolio of large concentrated positions in individual stocks.That said lets look at the pros and cons of Fatpipe Networks from the lens of the 235 red herring prospectus
Advantages
The company’s sector of WAN redundancy is unique and a fast growing one.WAN or Wide Area Network is a term used to define a Computer Network spanning multiple geographic points across cities or continents.Most Large Companies today have operations across multiple countries and their computers are linked together through a Wide Area Network (WAN).Ensuring that this network is secure ,reliable and redundant is the value proposition that Fatpipe Network brings to the table.The company has 7 patents registered in the US and its top management are experts in this field.
Low debt The company has a relatively low debt position of around 89 lakhs ($200,000) compared to equity of 37 crores.This is good as it shows that the company has grown through internal accruals and promoters’ cash infusions.Also no parts of the IPO proceeds is going to repay debt unlike other IPOs like Nitesh Estates and Tarapur Transformers.
Good Margins – The company’s 2009 FY numbers reveal a decent Gross Margin of 60% and a Net Margin of 10% which makes sense for a company of this size and the sector it operates in . Expect higher revenue numbers to improve the net margins
Good Management – The top management of Fatpipe Networks are all techies with a good background in education and innovation.I am biased towards CEO’s having a Phd in Engineering .It has also high quality VC investors in Draper Fisher.
All IPO Proceeds to be used in company expansion – The whole 49 crores expected to be raised will be used in expanding the company mainly on R&D and Marketing expenses
Disadvantages
I could not find any glaring disadvantages or red flags. The company has yet to get RBI approval for a foreign loan taken by its US subsidiary.It also has to get the land deed for its premises to be registered.It also has to face currency,legal and potential patent infringement risks.However these risks are par for the course for a small technology company.
Summary
The valuation of the company cannot be analyzed till the company discloses the price band , however operationally and technology wise the company looks a good albeit a risky bet (due to its small size and sector).However the upside also seems commensurately good to me based on a niche technology sector,solid financials and good management.I would be willing to buy a small position based on a decent valuation.
3 Comments
WHO are you kidding !!! This is a sucker’s bet. Don’t believe there will be a return. Whose doing the math?
The company earned a net profit after tax of Rs 399.37 lacs for the year 08-09, which was transferred to General Reserve. The balance at the end of the previous year in General Reserve was Rs 49.97 lacs. If you add, the profit transferred this year, to this figure, it should be Rs 449.34 lacs. Simple arithmetic. However, as per the statement of accounts as furnished in the DRHP, filed with SEBI, the figure is Rs 2103.04 lacs. For the difference, the corresponding entry shown in the balance sheet is Intangible assets.
They Failure to report multiple litigation as well as challenges to its patents. Currently under federal investigation of its labor practices. Financials would not likely stand up to a US SEC audit, hence the probable reason to change from a U.S. company to an India company and run the IPO there. Numbers are misleading and inaccurate.
Dr.Raghula Bhaskar and Ms Sanchaita Datta are the promoters of the company. They take in excess of $400,000USD of income on a VC supported venture. They keep quiet that they are husband and wife and control over 33% of the company. They claim profit, but no listing of dividends to its investors. If you scrutinize some of the other ventures such as their India based programmers company BOX, you will find the company is listed as being based out of their home. Makes one wonder whether the VC’s are even aware they may have financed these other entities. This begs to question: Is this IPO merely a sham to pay back the VC who by now must be impatient for a return.
Bottom Line: Fat Pipe years ago was at the right place at the right time. However, it has failed miserably to stay up with the ever-changing technology and marketplace. Other companies, new technologies, have sprung up bringing with them new technologies and innovation. Sorry Fat Pipe, you are OBSOLETE!!! Do you remember Iomega with the zip drive…? IOmmm who? A bet in Las Vegas would be a better risk
I have approved this comment as readers should be able to see viewpoints from all sides even if its so blatantly vested as from “jsmith@yahoo.com” . This comment does not seem to be from a genuine person and is obviously against Fatpipe management.His comments are trying to raise a scandal by saying some extremely stupid stuff.His first comment on financials is a sign of his biggest stupidity as Ragula Systems Development Company was merged in that year. The husband wife relationship,BOX company and salary is all disclosed in the prospectus.The salary at $200,000 does look a little high but could be considered fair if you look at how much the directors would have earned in USA .No technology company at this period of maturity pays any dividend ( look at Infosys).Fat Pipe may not have been as successful but hey if they were a CISCO we would be paying Billion of Dollars for the company. Readers should do their own due diligence as investing in small cap is always very risky and Indian markets don’t always inspire a lot of confidence in the quality of financial disclosures.
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