Quantum Softech: On shaky platform

Score: Below average

Krishnan Thiagarajan

Quantum Softech is making an initial public offer to part-finance the cost of setting up a software development centre at Hyderabad and overseas marketing office in the US. The cost of the project is estimated to be Rs. 7.35 crores, which is to be financed partly through this public offer and term loan of Rs. 0.75 crore. The company plans to set up an offshore software development centre at Hyderabad and overseas marketing office at Chicago, US.

According to the offer document, the company has entered into a business promotion understanding with Quantum IT Investments Inc., US, for overseas marketing. Quantum IT investments was incorporated only in October 1999 to provide seed capital to information technology-related companies worldwide.

Using the offshore development facilities, the company proposes to undertake software development on emerging platforms and services for database management, e-commerce solutions and also cater to on-site requirements for overseas clients.

Since the offshore outsourcing model has reached a fairly mature stage, the competition from established frontline and second-rung players is likely to keep a tight rein on both volume growth and sustainable operating profit margins. The company's ability to attract the best talent to such small offshore operations may be difficult on an ongoing basis.

In the absence of a financial track record and specialisation in any niche area, companies such as Quantum Softech may find the going tough in an increasingly competitive environment. The revenue projections of Rs. 5.08 crores in the first year and Rs. 13.51 crores in the second may be difficult to achieve. The operating profit margins of 44 per cent in the first year and 40.6 per cent in the second are optimistic, given the fact that even top-rung companies have found it difficult to maintain these OPMs on a sustained basis. In this backdrop, the risks associated with this IPO far outweigh the scope for returns. The offer closes on April 24 and the lead manager is Ashika Credit Capital.

Industry Class Computer - Software

Issue Type Equity

Offer price Rs. 10 per share

Offer Size Rs. 1.65 crores

Application amount Rs. 2000

Post issue equity Rs. 6.60 crores

Project Cost Rs. 7.35 crores

Project Completion March 2000

Offer Opens on April 17, 2000

Offer Closes on April 24, 2000

Promoters R. Vijay Kumar/JSR Subrahmanyam

Lead Managers Ashika Credit Capital

Listing Hyderabad/Bangalore