Fourth Generation Information Systems: Below Average

Score: Below Average

BL Research Bureau

THE absence of an established brand and a decent track record in the product business, the high risks involved in the product business vis-a-vis software development and the relatively untested software project execution capabilities, the public offer of Fourth Generation Information Systems may not offer adequate potential for capital appreciation.

Although the company is targeting the high growth domains such as financial services, healthcare, manufacturing and distribution industries, the risks outweigh the returns in this public offer.

Fourth Generation Information Systems is making a public offer to part-finance the expansion of its software development capabilities in Hyderabad, purchase hardware and software and invest in research and development for its products. The project cost is estimated to be Rs 14.15 crore, of which Rs 4.75 crore is to be financed through this offer.

The company is currently engaged in software development and services business. Using its domain knowledge of the senior management, Fourth Generation has developed SmartDoctor product suite for the healthcare industry, which is currently being marketed in the US. Through this public offer, the company proposes to increase the capacity of the development centre at Hyderabad and plans to focus on software solutions and services and IT enabled services. In software solutions and services, it plans to focus on customer and channel integration (involving CRM -- Customer Relationship Management -- solutions), e-business strategies and fulfillment solutions.

In products, the company has developed two products -- SmartDoctor Healthcare Suite and 1-on-CRM suite for the healthcare industry and as a decision support tool for customers respectively.

In addition, for marketing its products and services, it has entered into a memorandum of understanding with three US based firms -- Intra Link Infosystems Inc, Intra Link Health Systems Inc and IT Connections Inc. However, the promoters have shareholder interest in all the three marketing firms and even though these arrangements are not exclusive, the possible conflict of interest in marketing cannot be ruled out.

For 1999-2000, the company recorded income from software development of Rs 1.58 crore and Rs 0.43 crore from training and education and post-tax earnings of Rs 0.31 crore. From this level, it has projected total income of Rs 12.95 crore from projects and services and post-tax earnings of Rs 1.46 crore in 2000-01. On a paid-up equity of Rs 12.47 crore, the per share earnings works out to Rs 1.17. Given an order book of close to Rs 9 crore for projects and services and projected operating profit margins of 18.80 per cent, the financial projections appear achievable.

However, the absence of a track record in project execution, intense competition in software projects arena, high employee turnover and the lack of an established brand in products, make this public offer a risky proposition. It may be worthwhile for investors to monitor the performance of this company till 2000-01 (the first year of operations) before taking investment exposure in the stock at a later stage. At this point in time, given the risk-return trade off, an investment can be avoided.

Industry Class :Computer - Software

Issue Type :Equity

Offer price :Rs 10 per share

Offer Size :Rs 4.75 crore

Post issue equity :Rs 12.47 crore

Project Cost :Rs 14.15 crore

Offer Opens on :November 6

Offer Closes on :November 10

Promoters :Chalapthi Rao/Raghu Vasu and others

Lead Managers :Fedex Securities

Listing at :Hyderabad/Mumbai