Acropetal Technologies IPO – Not Junk but Not Compelling Either

Acropetal Technologies is a bit different from the run of the mill junk IPOs coming out in Feb 2011.After a deluge of crap IPOs in 2010,2011 has not seen many of them as the markets have corrected by around 15%.However a recent rally has bought out the junk companies in association with their associated shady bankers and market operators.Omkar,Sudar,FCL are some of the totally crap IPOs  which have happened or in the process of happening.Acropetal Technologies is an IT/ITES company plans to raise Rs 170-crore through its IPO on February 21. The company has fixed the price-band of its IPO at between Rs 88 and Rs 90 per equity share.The company will use Rs 55 crore for acquisitions and Rs 26 crores for a software office.The company seems better quality than the junk and may merit a look from investors though there are much better companies on offer at better prices in the secondary markets.Here are the positives and negatives of the IPO

Negatives

1) Customer Concentration – “top 5 customers contributed approximately 85.68% of our income from operations for the 9 months period ended December 31, 2009. Further, our top ten customers contributed approximately 94.91% of our income from operations for the same period”

2) High Debt – The company has a surprisingly large amount of debt with a D/E ratio of 1:1 which is quite for an ITES company.The company has reasonably good net margins of 20% and has shown decent growth rate as well.

3) Bad Sector – Small and Medium sized IT/ITES companies in India are facing strong headwinds in terms of high wage costs,lower growth compared to the large IT companies etc.Even large medium IT companies have shown falling stock prices.Tough to see how a small company Acropetal is a good bet in this scenario when companies like HCL,Tech Mahindra are available for 10 P/E.

4) Management – Except the Managing Director,there is no management depth plus the MD himself does not seem to have to distinguished a career or academic education.

Positives

Good Growth – The Company has managed to grow by about 50% for the last 2-3 years with a margin of 20% which is quite decent.

Summary

While the company is not the total junk that is dished out in the Indian primary market,there is nothing compelling about Acropetal to buy it.There are tons of other small and tiny IT/ITES companies in the public markets with better valuation and prospects.