Mindteck (India): Below Average

Score: Below Average

Krishnan Thiagarajan

Mindteck (India) is making a rights offer of equity to part-finance the working capital and capital expenditure for buying hardware and constructing a building, at an aggregate project cost of Rs 16.50 crore.

The rights offer is being made in the ratio of one equity share for every four held by the shareholders as on October 24, 2000. The post-issue equity is expected to be Rs 6.25 crore.

Investment prospects

* Although Mindteck (India) is focussed on the high growth area of embedded software and Internet/Java applications, the offer document has failed to articulate a clear cut strategy by which the company will be in a position to capitalise on this opportunity. In the absence of a client list, testimonials and case studies of projects executed by the company in the past, demanding a stiff price of Rs 100 linked to market price seems to be on the high side.

* Though the offer document has specified that it will provide software development services -- both onsite and offshore -- to a range of clients spread over the US, the UK, Singapore and Japan, and has marketing offices, it has now entered into tie-ups only with Mindteck (Japan) and Mindteck (US). Although the existence of marketing offices will help Mindteck (India) garner orders, it does not automatically translate into a big positive for the company, without a clearly articulated marketing strategy. This again has not been spelt out in the rights offer document.

* The company's financial performance of the past has been uninspiring. For the 15 months ended June 30, 2000, the company recorded losses of Rs 1.41 crore on a turnover of Rs 5.42 crore. However, the company is beginning to show signs of a turnaround in the first quarter-ended September 30, 2000. It recorded post-tax earnings of Rs 0.84 crore on a turnover of Rs 2.44 crore.

* In addition, further equity dilution is on the anvil as the directors of Mindteck (India) have approved the amalgamation of Nicco Infotech, an information technology arm of Nicco Group, US. Subject to legal formalities, the scheme of amalgamation provides for the issue of one share of Mindteck (India) for every twelve of Nicco Infotech. Nicco Infotech is engaged in the business of providing training and implementation skills on Oracle ERP packages. As of June 30, 2000, the company had incurred a loss of Rs 0.18 crore on a turnover of Rs 0.97 crore.

Similarly, the directors of Mindteck (India) have also approved the acquisition of Mindteck Consulting Inc. through a share swap at a later date. According to the offer document, the company proposes to make a preferential issue of capital after the completion of the rights issue. Mindteck Consulting Inc. is now engaged in the business of Internet application development and embedded software based in New Jersey, US. As of June 30, 2000, it had revenues of $8.69 million. The contribution of these two acquisitions will take some time to improve overall financials of Mindteck (India).

For the patient investor, this investment is likely to yield moderate capital appreciation in the long term. However, shareholders who already have sizeable exposure in the stock may wait for the earnings performance for the second quarter, confirm the turnaround and then take an investment exposure in the stock through the secondary market. At a stiff price of Rs 100, which is almost in line with the market price, this rights offer may be ignored.

What the company says

* Out of the project cost of Rs 16.50 crore, Rs 12.50 crore is to be raised through this rights offer of equity being made at an offer price of Rs 100 per share. The balance of Rs 4 crore is to be secured either through debt or as an alternative through issue of non-convertible preference shares through private placement to FIIs, mutual funds, and so on. Besides, TAIB Bank, the promoters of this offer, through its subsidiary, Embtech Holdings, Mauritius, has agreed to subscribe/arrange subscription in case the company fails to mobilise the sum of Rs 4 crore through the private placement of preference shares.

* Mindteck (India) was formerly known as Hinditron Informatics and was engaged in the business of distribution of medical equipment, graphics software and related products. In 1998-99, Embtech Holdings, Mauritius (a subsidiary of TAIB Bank EC, Bahrain) and other investors -- Mr Pradip Shah and Mr Darius Pandole -- acquired equity shares, representing 65 per cent of the equity, from Hemant Sonawala and associates -- the original promoters of the company. After the acquisition, they made an open offer at Rs 8 per share to acquire 20 per cent of outstanding equity, which failed to garner adequate support from the shareholders.

* Following the change in management, the new promoters stepped up the focus on software development and consultancy services in the high growth areas of embedded software and Internet/Java applications. As a part of the restructuring exercise, in 1999-2000, the company also reduced the equity share capital from Rs 20 crore to Rs 5 crore in order to wipe out the accumulated losses, mainly related to the non-software business.

* The company has entered into strategic tie-ups with its marketing arms -- Mindteck (Japan) and Mindteck (US) -- to perform software consulting, design and programming services in support of designated projects secured by the marketing arms. Mindteck (India) has also entered into an MOU with Mahadev.com to serve as an implementation partner for the entire range of products and services of Mahadev.com in the field of e-commerce.

Industry class :Computer - Software

Instrument type :Rights offer of equity at Rs 100

Issue size :Rs 12.50 crore

Issue opens :December 1, 2000

Earliest close :December 29,2000

Lead managers :Ind Global Financial Trust

Project cost :Rs 16.50 crore

Post issue equity :Rs 6.25 crore

Listing :M/B/A