Investors can stay away from the Initial public offer of Dhanus Technologies (Dhanus), given the high competition in its business segments and relatively high execution risks.
At the upper end of the price band (Rs 295), the offer values the company at about 17 times its trailing 12 month earnings, without factoring in the equity dilution due to the offer.
This appears stiff in comparison to stocks of smaller telecom and software services as well as large hardware companies.
At the higher end of the price band, the company will raise Rs 113 crore from the offer to finance fresh equipment for its fleet tracking business and augment infrastructure facilities in its IT and BPO divisions.
Business outlook
Calling cards division: The key revenue driver (55 per cent of revenues), this business involves reselling talk-time of international telecom operators under the company’s own brand name to Indians residing or travelling abroad. Internationally, the MVNO (mobile virtual network operator) business is dominated by companies that enjoy strong brand equity in another line of business. which they leverage in this business (egs: Virgin Mobile and Disney Mobile). Dhanus does not have comparable brand value that could be successfully leveraged.
The competition in this space is already stiff, with Bharti Airtel, Reliance Communications and VSNL aggressively promoting their international calling cards overseas, imposing margin pressures that the company may not be able to withstand in the long run.
Moreover, Dhanus’ service cannot be used with mobile telephones, giving it little uniqueness or competitive advantage. The major players in this business, which have substantial network management experience and tie-ups with international telecom operators, may be much better placed to tap this market.
There could also be legal hurdles for this leg of Dhanus’ business, as the offer document mentions that it does not possess a ‘no objection certificate’ (NOC) from the Department of Telecommunications for selling international cards in India.
Fleet Tracking: A substantial portion of the issue proceeds has been earmarked for expanding the company’s products which help track vehicle (fleet) movements. A report published last year by Frost and Sullivan has estimated the market size for fleet tracking to be $75 million by 2011; it was only $6.5 million as of 2005. This indicates that the market in India is small compared to the US where vehicle tracking is widely adopted by companies.
In the Indian context, the government is emerging as a key user of such services and is touting GPS systems for trains, local buses and even post-office vans. Players such as CMC, which have an existing relationship with government clientele, or HCL Infosystems, appear well-placed to cater to this market. Ramping up this service would involve tie-ups with VSAT (very small aperture terminal) players for provision of satellite bandwidth. The bandwidth is stiffly priced and given the expenditure it would entail, Dhanus may be forced to work with thin margins.
BPO and IT services: The company provides BPO services such as telemarketing and customer services to overseas clients. It also provides software services in the telecom segment.
Given the company’s limited experience in running a telecom network and providing software services, this division’s prospects are uncertain. Scaling up of the business may not happen at the requisite pace. Exposure to the North American market would expose the company to rupee appreciation risks. Other factors such as attrition and wage inflation also pose key execution risks.
Considering the above factors, it appears that the execution and competitive risks associated with the business are relatively high; risk-averse investors can avoid the offer.
Offer details: The offer is open from September 10-12.