How to list a so-so proprietary biz on Asia's oldest exchange

By VS Fernando

The Offer

Even before completing a year of operations, the Mathura-registered Jointeca Education Solutions is making a premium public issue. The company is offering 35.69 lakh shares of Rs 10 paid-up at a fixed price of Rs 15 a piece. While 5.04 lakh shares (14.12%) are reserved for the ‘Market Maker’ Ajcon Global Services who is lead-managing the issue, 30.65 lakh shares are being offered to the public.

Like the earlier SME IPOs, in order to keep the retail investors at bay, the minimum application amount has been kept at as high as Rs 1.2 lakh. In other words investors in this issue have to apply for a minimum of 8000 shares and multiples thereof.

[caption id=“attachment_418993” align=“alignleft” width=“380”]  Like the earlier SME IPOs, in order to keep the retail investors at bay, the minimum application amount has been kept at as high as Rs 1.2 lakh.[/caption]

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Issue Object

Jointeca, which has not seen a top line of even Rs 2 crore, proposes to expand its product ‘Guruseva’ (Educational ERP Solution) under BOOT (Build, Own, Operate & Transfer) Model through Cloud Computing solutions besides establishing/expanding infrastructure for its B2B Educational Portal ‘shiklo.in’ at a cost of Rs 6.16 cr. The promoters claim to have already brought in Rs 1.5 cr. The balance is being funded through the IPO. Even though the company’s capital expenditure is fully met by public funds, the project cost and the funding have not been appraised by any external agency.

Parentage

The offer document presents M/s Vishal Mishra, Laxmi Agrawal and Abhay Gautam as promoters of Jointeca. The core promoter, Vishal Mishra, who holds as much as 54.1% out of the post-issue promoter stake of 64.3%, claims to have over 18 years experience in IT field. Until recently he was conducting the same business under a proprietary firm in the name of Jointeca Technologie which reportedly provided IT services to educational institutions like schools and colleges. Incorporated in May 2011, the public company took over the business of the promoter’s proprietary firm in November 2011 on a slump sale basis for Rs 5.85 cr against which the company issued 39 lakh shares of Rs 10 each at a price of Rs 15 per share.

Business

Jointeca reportedly offers Educational ERP solutions through its product ‘GuruSeva’. Its business is concentrated mainly in the Northern Region of India. The product GuruSeva is offered both as a Desktop Application and as a service through the Software as a Service model (SaaS). Jointeca also claims to offer online education through its portal www.shiklo.in. The portal provides guidance to students who can choose from a variety of career options. The company claims to have entered into a Memorandum of Understanding (MoU) with TransNational Computer LLC, Dubai for providing complete education management solutions.

Prospects

With the issue proceeds Jointeca proposes to build necessary content to support its educational portal shiklo.in besides developing education infrastructure projects under BOOT model. The company eyes on various government education schemes including the Sarva Shiksha Abhiyan to cement its future in the education field. It plans to add another 50 schools to its clientele within the current fiscal.

Valuation

The IPO price of Rs 15 values the company at a market cap of Rs 15 cr. How does one justify this valuation for a year old company? One may argue that the promoters too have subscribed at the same price of Rs 15 a share. Nevertheless, the fact is, 39% out of the 64% promoter-stake was brought in through the adjustment against the purchase of the business of the promoter’s proprietary firm. Was the proprietary business worth Rs 5.85 cr - the consideration that the public company accounted for in its books?

Though they say the slump sale was based on an independent valuation, the proprietary firm’s financials were far from convincing. The 1997-established firm had a top line of only Rs 56 lakhs in 2010 and its net profit was just Rs 4 lakh. From Rs 25 lakh in March 2011, the firm’s asset value was inflated to Rs 5.82 cr in November 2011 without adding any tangible asset. In other words of the Rs 5.85 cr adjusted against the promoters contribution, nearly Rs 5.2 cr was accounted for Goodwill’! For a business which could not net a profit of more than 16 lakhs even after 14 years of existence, how can one attribute a value of more than Rs 5 cr for its goodwill?

For the 142 days-period ended March 2012 Jointeca posted a profit of Rs 5.85 lakh on a share capital of Rs 6.43 cr. Post-issue, the company’s capital base will increase to Rs 10 crore. How the company will service the enlarged equity with the present bottom line is anybody’s guess. Thus, for a non-dividend paying company having lackadaisical track record the premium of Rs 5 seems to be grossly unjustified.

Though they say the slump sale was based on an independent valuation, the proprietary firm’s financials were far from convincing. The 1997-established firm had a top line of only Rs 56 lakhs in 2010 and its net profit was just Rs 4 lakh. From Rs 25 lakh in March 2011, the firm’s asset value was inflated to Rs 5.82 cr in November 2011 without adding any tangible asset. In other words of the Rs 5.85 cr adjusted against the promoters contribution, nearly Rs 5.2 cr was accounted for ‘Goodwill’! For a business which could not net a profit of more than 16 lakhs even after 14 years of existence, how can one attribute a value of more than Rs 5 cr for its goodwill?

For the 142 days-period ended March 2012 Jointeca posted a profit of Rs 5.85 lakh on a share capital of Rs 6.43 cr. Post-issue, the company’s capital base will increase to Rs 10 cr. How the company will service the enlarged equity with the present bottom line is anybody’s guess. Thus, for a non-dividend paying company having lackadaisical track record the premium of Rs 5 seems to be grossly unjustified.

Manager’s Track

Jointeca’s IPO is managed by the Mumbai-based Ajcon Global Services who is also acting as a market maker. Ajcon has underwritten the entire issue of Rs 5.35 cr. It may not be difficult for Ajcon to collect 446 applications - the maximum number required to make the IPO sail through. But, will the investing community get a decent return from the IPO in the foreseeable future?

As a matter of fact, in the recent past, Ajcon has not brought out any IPO. Of the public issues handled by Ajcon during the mid-nineties primary boom, except Tuni Textiles, all others have simply vanished.

Concerns

• Little known promoter; maiden public venture

• Main promoter’s actual cost of holding is negligible; Significant portion of the promoter’s contribution has been brought in through questionable accounting

• Limited market exposure - Operations confined to only Northern region of the country

• Brands lack popularity

• Company does not own the Trademarks “Jointeca”, “GuruSeva” and “Shiklo.in”

• Lacks experience in handling large projects

• Proposed projects not appraised by any external agency

• Present profitability too small to service even the existing equity

• Expansion plans are solely dependent on the success of the IPO

• Operating cash flow is highly negative

• Dividend returns unlikely in the foreseeable future

V S Fernando is a veteran IPO Analyst who has been tracking domestic Public Offerings since 1986.