Aztec Software: Average

Score: Average

Krishnan Thiagarajan

i2,,The risks associated with this IPO from Aztec Software and Technology Services concentrating on the cutting edge technologies such as XML, Java and database internals are fairly high.

However, for investors with a high risk appetite, this IPO at a floor price of Rs 80 (and a price-earnings multiple of 15 times its annualised 2000-01 and 21 times 1999-2000 per share earnings) holds decent potential for capital appreciation.

In addition, focussing on the Application Service Providers and B2B exchanges, which is a new business model, is fraught with risks, though Aztec has shown resilience in morphing itself successfully in the past. The competition levels are also likely to be fairly intense. This to a large extent may negate the strong credentials of the promoters in this line of business.

Aztec Software and Technology Services is making a IPO to part-finance ongoing capital expenditure including the setting up of a new development centre and a new employee training centre. Of a project cost Rs 52 crore, Rs 14.40 crore is to be expended for expanding facilities and Rs 25.70 crore for constructing a new building. In addition, it has apportioned Rs 8.40 crore (16 per cent) of the total project cost towards funding acquisitions, joint ventures and strategic alliances.

Sound credentials: Promoted by Mr S. Parthasarthy, Mr V. Swaminathan and e4eHoldings (a company in which Mr K. B. Chandrasekhar of Exodus Communications holds a 69 per cent equity stake), Aztec has reflected the ability to successfully morph from its initial focus on database internals, datawarehousing and middleware technologies to target the e-engineering solutions in the ASP and B2B space and acting as a product development partner involving middleware, datawarehouse and XML technologies.

Huge market potential: The potential market niche in the ASP, B2B and core product development space is huge. Although the sustainability of ASP and B2B business model is uncertain, the potential for growth for companies with competence and experience in this segment is immense.

Sharply focussed operation: Aztec's decision to focus on the e-engineering solutions in the ASP and B2B space and as product development partners for companies involving middleware, datawarehouse and XML technologies is a big positive. In addition, the use of the offshore software development model, which has been popularised by frontline software companies, is likely to help improve the operating margins in the medium term.

Stiff competition: As the ASP and B2B markets are in their infancy, the competition levels in these segment are cutthroat. The competition stems from US-based systems integration firms, traditional software firms in India and player from skill surplus regions such as the Philippines and Ireland, which are all aiming to gain an early mover advantage in this space.

Managing scalability: Going forward, one of the key issues which will face Aztec is the ability to manage growth and develop a scalable business model which has builds-on executing contracts to tight deadlines, managing an expanding staff strength, honing specialised skills and translating them into repeatable systems, delivery and processes. As a company of a relatively small size, managing scalability will be the biggest challenge facing Aztec.

Client concentration: For the first quarter-ended June 30, 2000, nearly 76.75 per cent of its revenues came from the top five customers. The client concentration levels of this magnitude is inevitable in relatively small-sized companies. But the concern stems from the fact that Jam Cracker Inc., to which Aztec provides software development services, accounts for 34.46 per cent of the total revenue (Rs 4.76 crore out of a total revenue of Rs 13.83 crore) in the first quarter.

Track record: In the first two quarters of 2000-01, Aztec has recorded an sharp rise in its turnover and post-tax earnings. For the half year-ended September 30, 2000, it had recorded revenues of Rs 31.97 crore and post-tax earnings of Rs 8.59 crores. This is significantly higher than the revenues of Rs 13.69 crore and post-tax earnings of Rs 4.10 crore for the year-ended March 31, 2000. The company does not have a track record which is long enough to inspire confidence, although the promoter credentials cannot be ignored in this case.

Key intangibles: In the absence of specialised skills in vertical segments, Aztec may face market risks, particularly in bagging contracts in the ASP and B2B space. In a highly technology-intensive space, the success of the project hinges on Aztec's ability of to hold on to its key employees. As the company is yet to attain critical mass in terms of revenues and build its quality systems and processes, the risk involved in this venture is fairly high. In addition, if the company puts through an acquisition, it may face the risks associated with employee retention, technology and customer integration. The offer closes on Octover 12 (book-building) and the lead manager is J. M. Morgan Stanley.