Public party - Part 3

In the third part, a look at e-commerce player Infibeam and antivirus provider Quick Heal

In the fast-growing e-commerce segment, Infibeam has been the first to launch an IPO worth Rs.450 crore. Besides its namesake retail site, the company also has a BuildaBazaar (BaB) market place that provides customisable online storefront solutions. It, however, has a long track record of operating at a loss. According to the draft red herring prospectus, Infibeam made losses from FY12-15. In FY16 though, the company reported profit of Rs.8.7 crore. Is this a turnaround or just a pause? 

Having an e-tail site and a market place under one umbrella can provide synergies when it comes to merchant and customer acquisition. Infibeam has already grown its merchant network close to 50,000 at a CAGR of 273% since 2012. The user base too, has increased at 30% to more than 7.8 million as of March 31, 2015.

But analysts reckon the valuation (7.9x FY15 sales) is “rich” even if the stickiness and higher growth potential of the BaB marketplace is factored in. Analysts at PhilipCapital value the consolidated business at Rs.1,500 crore, which is 5.2x the company’s FY15 sales. Compared to Infibeam, Flipkart, the market leader, is valued at 3.34x its FY15 gross merchandise value (GMV), while Snapdeal is valued at 1.4x GMV. 

Currently, the stock is trading at 12.4x its FY15 sales and 10.6x FY16 sales. “The problem with technology-based companies is that they are valued on the basis of traffic or sales happening on their platform. But these valuations are not sustainable as they are not reporting any profit. That is the reason we are seeing e-commerce players like Flipkart losing their valuation,” says forensic accounting expert Abhishek Asthana. 

Moreover, the e-commerce industry is highly competitive, with companies starting price wars to gain market share. “Companies operating in the sectors are burning cash in acquisitions and heavy discounts. Any future inability of the company to raise fresh funds may put the company at risk of losing market share,” analysts at IIFL say in a note. 

Under the scanner

In the case of Pune-based IT security solutions provider Quick Heal Technologies, corporate governance-related matters have put the stock under the scanner. A day ahead of listing, Manohar Malani, managing director at Kolkata-based firm NCS Computech, wrote to Securities and Exchange Board of India (Sebi), complaining about the transfer of 20,000 shares of Quick Heal Technologies, which he claimed belonged to him and his family. The red herring prospectus filed by Quick Heal did not feature either Malani or any of his family members. While Quick Heal has issued clarification to the exchanges and Malani has been arrested following an FIR filed by the company accusing him of forgery, cheating and criminal intimidation, the matter remains sub judice. 

The company has a market share of over 30% in the retail segment. The company provides security solutions under ‘Quick Heal’ and ‘Seqrite’ for desktops, laptops, mobiles, cloud, network, gateways etc. But running a technology business comes with its own risks. Failure to anticipate disruptive technology or low-priced strategy of a competitor can have a negative impact. Already, a worry point is the decline in the size of the laptop/desktop market (Quick Heal’s mainstay) due to higher adoption of tablets and smartphones. 

“Quick Heal has invested substantially in new businesses in the last three to four years. This is visible in higher R&D expenses and a decline in EBITDA margins. The company’s future performance is predicated on the success of new businesses — enterprise, government and mobile,” says Govind Agarwal, analyst at Prabhudas Lilladher. 

If it can’t scale up in these segments, it could further erode operating margins. From 53.5% in FY12, the EBITDA margin has already dropped to 32% in FY15. The topline though, has grown at 17% CAGR during the same period.  

At the upper price band of Rs.321, the stock got a valuation of 36.4x P/E based on FY15 earnings, which is expensive compared to global peers such as Symantec (17x) and SAP SE (27x). This has now come down to 32x FY15 earnings and 30x trailing FY16 earnings.  

(This is the third of a four-part series. Read the first and the second part here)