IPO

Friday, February 05, 2016 Click here for Rating Reckoner
Quick Heal
Leading provider of security software products
CM RATING44/100
Incorporated by Kailash Katkar and Sanjay Katkar in 1995, Quick Heal Technologies is one of the leading providers of security software products and solutions in India, with a market share of over 30% in the retail segment. The company's end customers include home users, small offices and home offices (SOHO), small and medium-sized business (SMBs), enterprises, educational institutions, as well as government agencies and departments.

Its proprietary antivirus technology, which is based on an innovative behavior and threat detection system, works to detect security threats including virus and malware attacks in real time to protect its users' IT assets across platforms, including Windows, Mac, Android, iOS and Linux, and across devices, including desktops, laptops, mobile/ smart phones and tablets, while aiming to ensure resource availability, business continuity and an uninterrupted digital experience.

The portfolio includes solutions under the widely recognized brand names Quick Heal and Seqrite for desktop and laptop security, mobile / smart phone security, endpoint security, gateway security, network security, cloud-based mobile device management (MDM) systems, data loss prevention (DLP) systems and family safety software. Since the company incorporation, more than 24.5 million licenses of its products have been installed and as of December 31, 2015, it had over 7.13 million active licenses spread across more than 80 countries.

The company sells its solutions directly and through distributors, whom ii refer to as channel partners, who in turn distribute its solutions through resellers. As at December 31, 2015, the company has a network of over 19,000 retail channel partners, 349 enterprise channel partners, 319 government partners and 944 mobile channel partners.

The company categorizes its sales in two segments: retail sales and other sales. Under Retail Sales Network, Quick Heal uses network of retail channel partners spread across the country to cater to home users while other sales refers to sales from enterprise channel partners, government partners, mobile channel partners and sales outside India. As of FY15, Quick heal derived 86.76% and 13.24% of revenue from retail sales and other sales respectively. Geographically, the company derives 97.31% and 2.69% of revenues from India and overseas respectively.

The Offer and the Objects

The issue comprises public issue of Rs 250 crore with equity shares of 0.80 crore of face value of Rs 10 each at lower price band of Rs 311 per share and equity shares of 0.77 crore of face value of Rs 10 each at higher price band of Rs 321 per share. In addition to the above, there is an offer for sale of 0.63 crore of equity shares of Rs 10 each which comprises selling shareholders namely: Promoters (Kailash Katkar and Sanjay Katkar, total of 0.37 crore shares) and Sequoia Capital Indian Investment Holdings 111 and Sequoia Capital India Investments 111 (comprising 0.26 crore shares in total).

The minimum bid lot is 45 equity shares and in multiples of 45 equity shares thereafter. The issue is made through a book building process and will open on 8 February and will close on 10 February, with anchor investor bidding date of 5 February 2016.

In addition to achieve the benefits of listing the equity shares on stock exchanges, enhance the visibility and brand image among existing and potential customers and provide liquidity to the existing shareholders, the company intends to utilize the proceeds of the public issue (Rs 250 crore), towards advertisement and sales promotion (Rs 110 crore), capital expenditure on R&D (Rs 41.90 crore), and Rs 27.60 crore for purchase, development and renovation of office premises in Kolkotta, Pune and New Delhi and balance for general corporate purpose.

Strengths

The company offers various security software solutions to meet diverse user requirements, which are spread across multiple price points to meet all the layers of user security requirements.

The management has been successful in implementing a successful business model across pan India and creating a brand within this short time frame through a strong network of channel partners. The number of active licenses installed by users increased from 2.5 million as of March 31, 2011 to 7.13 million as of December 31, 2015.

The R&D and technology capabilities represent the core competency and a key competitive advantage of the company. The in-house R&D team comprised 547 employees, which was 39.18% of the total employees, as of December 31, 2015, which manage the entire R&D value chain from conceptualization, design and prototyping, to testing, development and commercial release.

Weaknesses

The business dynamics in which Quick Heal operates undergoes sea changes with each passing day.

The retail segment is expected to witness sluggish growth in future due to greater use of smart phones rather than personal computers (PC) and laptops. Further, in the mobile platform, there is limited scope for growth since majority of the users do not use paid antivirus software.

The competition in the enterprise segment is quite high with MNCs of the likes of Symantec, Intel, Microsoft and Kaspersky Lab present. Entry in to enterprise and mobile segments and increasing competition have led to higher advertising and sales promotion expenses adversely, affecting Quick Heal's operating margins from 53.5% in FY 2012 to 32.1% as of FY 2015.

Future growth is pinned on the enterprise solutions segment, which earn lower margins compared to retail sales, which is expected to further impact the overall margins in future.

The operating systems like Mac (Apple) and Windows 10 (with inbuilt windows defender) will have limited need for an antivirus program as the operating system is less vulnerable than Windows XP.

To maintain and advance the position in the market, the company will require continuing to incur R&D expenditure, which it expenses out every year. The R&D expenditure will continue to remain high (currently around 16.1% of total revenue of FY 2015 and around 19.5% of total revenue for the six months ended September 2015).

Valuation

For FY 2015, the consolidated net sales grew by 18% to Rs 286.12 crore, the OPM stood at 32.1% as compared to 43% for FY 2014, resulting in a 12% lower OP of Rs 91.80 crore. PBT before EO was lower by 23% to Rs 79.82 crore. After EO adjustment of Rs 17.33 crore for FY 2014 as compared to nil for FY 2015, PBT after EO was lower by 7%. Finally, PAT was lower by 8% to Rs 53.80 crore. For the six months ended September 2015, revenues stood at Rs 148.18 crore and PBT stood at Rs 36.73 crore. After paying Rs 12.51 crore of tax, consolidated PAT for the six months ended September15 stood at Rs 24.22 crore

At a price of Rs 321, the post issue diluted equity share capital of the company works to Rs 69.90 crore of face value of Rs 10 each. On this equity, the EPS for FY 2015 works out to Rs 7.7. The EPS for six months ended September 2015 is not annualized due to seasonality of business.

At higher price band of Rs 321, the scrip is offered at a P/E of 41.7 times its FY 2015 earnings.

Quick Heal : Issue highlights
For Fresh Issue Offer size (in no of shares )
- On lower price band0.80 crore
- On upper price band0.77 crore
Offer size (in Rs crore )250
For Offer for Sale Offer size (in Rs crore)
- On lower price band195.93
- On upper price band202.23
Offer size (in no. of shares )0.63 crore
Price band (Rs)*311-321
Post issue capital (Rs crore)
- On upper price band69.90
- On lower price band70.20
Post-issue promoter & Group shareholding (%)73.0
Issue open date8/2/2016
Issue closed date10/2/2016
ListingBSE,NSE
Rating 44/100

Quick Heal: Consolidated Financials

1203(12)1303(12)1403(12)1503(12)1509(06)
Net Sales178.98205.01242.84286.12148.18
OPM (%)53.5%51.3%43.0%32.1%29.7%
OP95.67105.16104.3891.8043.99
Other in. 5.689.759.798.224.09
PBDIT101.35114.91114.17100.0248.08
Interest0.000.000.000.000.00
PBDT101.35114.91114.17100.0248.08
Dep.2.134.4410.8120.2011.35
PBT 99.22110.47103.3679.8236.73
EO 0.000.0017.330.000.00
PBT after EO99.22-4.2786.0379.8236.73
Tax (including Deferred Tax)31.0433.5727.6526.0212.51
PAT68.1876.9058.3853.8024.22
EPS (Rs)*9.711.010.07.7#
*EPS is on post issue equity capital of Rs 69.9 crore of face value of Rs 10 each on higher price band of Rs 321
#EPS is not annualized
EO: Extra ordinary items, EPS is calculated after excluding EO and relevant tax, Figures in crore
Source: Capitaline Database

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 Rating Reckoner
Rating range Risk-return profile Recommendation
51 or above Low risk, moderate to High return Must subscribe
45-50 Low risk low return or Moderate risk, moderate/high return May subscribe
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