Insufficient track record
The company is over-dependent on a few clients and is in the lower end of the BPO business

Promoted by A Saravanan and R Jagadish (both chartered accountants and 1982 B. Sc Physics batch-mates), Allsec Technologies is primarily a BPO service company. It provides support services for inbound customer care; technology helpdesk; inbound and outbound Tele-services that include sales, collections, lead generation and market research. It also provides third-party quality assurance as well as HR & payroll processing. The proceeds of the IPO will be primarily utilised to repay loans of Rs 10 crore and set up a new facility at a cost of Rs 28 crore. Capacity will go up from the present 700 seats to 1000 by June 2005, 1300 by August 2005 and 1700 by December 2005. The existing as well as new facilities are in Chennai.

Strengths

The BPO industry has good growth potential and is expected to grow at CAGR of 50%. Except Datamatics Technologies, there is no other listed company focusing only on BPO.

Weaknesses

The company is over-dependent on a few clients. In the 12 months ended 31 December 2002, 15 months ended March 31, 2004, nine-months ended December 31, 2004, its single largest client, CompuCredit, accounted for 36%, 26% and 52% of its total revenue, respectively. During the same periods, three largest clients (which varied from period to period) accounted for 88%, 64% and 73% of the total revenue, respectively. The company expects to continue to remain over dependent on CompuCredit and a small number of clients.

Contractual arrangements with CompuCredit are stiff. CompuCredit has the right to purchase the existing facility (including transfer of employees) on or after 31 March 2009 and before 31 March 2011 or in the event of any prescribed termination event prior to 31 March 2009. Following such a transfer of the facility and employees to CompuCredit, Allsec can suffer a significant loss in revenues and profitability

Besides, the company’s BPO services cater to the lower-end (voice-based) of the BPO value chain. Serious doubts have been raised on sustainability of this business model.

Most of its business comprises fixed-price, dollar-denominated contracts. In the era of rising employee costs and rupee appreciation, profitability will be under pressure.

Expansion of capacity from 175 seats to 675 seats without matching rise in revenue resulted in a loss of Rs 16.45 crore on a revenue of Rs 25 crore in FY 2004 (15 months). However, the expansion it undertook turned it around into profit of Rs 7.91 crore on revenue of Rs 42 crore in the nine months ended December 2004. Book value is still just Rs 6 (lower than the face value of Rs 10). Now the company is again in an expansion mode!

Valuation

On an annualised basis, consolidated FY 2005 EPS on post-issue equity works out to Rs 8.8. This EPS is based on full utilisation of existing capacity. In the BPO business, expansion of capacity generally entails substantial pressure on the margin. The offer price band is Rs 135-162. In January 2005, the company allotted its shares to two venture capital funds at Rs 39.6 and Rs 29.6 and to CompuCredit (post-issue stake: 5.7%) at Rs 51.7.

The offer price band is Rs 135-162. The offer price band discounts the EPS 15 to 18 times. The nearest comparable company is Datamatics Technologies, which trades at P/E of 17. Datamatics is more than double Allsec’s size and has a much better track record, though its post-IPO performance has been adverse. Datamatics currently trades around Rs 98, which is lower than the offer price of Rs 110 a year ago.