Datanet Systems: Below Average

Score: Below Average

Suresh Krishnamurthy

THE initial public offer (IPO) of Datanet Systems can be avoided by investors since the offer does not appear to hold potential to deliver returns commensurate with the risks.

However, investors can keep track of the company as it appears to have the right ingredients in the form of experienced employees, which may be effectively exploited in the software service industry, a segment which the company does not focus, as of now.

What the company says: Datanet is a product company rather than a software services company catering to the domestic IT industry. The company specialises in workflow automation and computer telephony integration.

Datanet has been involved in developing its own workflow automation solutions, primarily aimed at the banking sector. The company has executed various projects for its main customers -- Department of Posts, Federal Bank, Vijaya Bank, Syndicate Bank and Bank of Baroda.

The company sold its wireless division involved in installation, commissioning and network design of data communication network to Harita Infoserve for a total consideration of Rs. 1.29 crores in 1999.

Datanet recorded operating revenues of Rs. 3.94 crores and profits of Rs. 0.06 crore for the year-ended March 2000. However, without a profit of Rs. 1 crore on the sale of a division, the company would have made a loss. Datanet also made a loss in the year-ended March 1999.

According to an appraisal by Bank of India, the major source of revenue for the company is expected to be the banking sector. The appraisal projects revenues of Rs. 15.56 crores for the year-ended March 2001 and profits of Rs. 1.18 crores. Datanet has about 64 professionals as of now.

Prospects: The prospects for a product company targeting the domestic industry is not that bright, especially in the capital market. Moreover, in the case of Datanet, its focus on the banking industry is a distinct disadvantage. The banking solutions segment in India is one of the most competitive in the IT industry. This is reflected in the poor operating margins of the company. Against this backdrop, the valuations commanded by the company in the market are unlikely to be impressive. Against this backdrop, investors can avoid the offer.

However, a positive aspect appears to be the company's employee strength. If this is exploited in the software services industry, the returns in the form of profitability are likely to be much better. As such, this company is a good prospect to keep a watch out for.

The offer opens on August 23 and closes on August 28. The lead manager is Indbank Merchant Banking Services.

Industry class :Computer Software

Instrument type :Equity at par

Issue size :Rs. 3.15 crores

Application Amount :Rs. 5 per share

Issue opened :August 23

Earliest close :August 28

Lead managers :Ind Bank Merchant Banking

Project cost :Rs. 3.60 crores

Debt:Equity :.001:1

Post issue equity :Rs. 12.60 crores

Listing Mumbai, Bangalore & Hyderabad

Promoters :A. Prabhakar and Associates