Quick Heal Technologies IPO: A Quick take

We always wonder that in spite of so much noise about our IT industry’s clout in placing india as global hub for IT solutions, none of our IT behemoths like Infosys, TCS or Wipro have ever developed a product like Windows, IOS, Oracle. These companies operates on cheap Labour to win business; term cheap labour because that is what most of our IT professionals are doing in the labs of these behemoths…they just type the codes of a program developed somewhere in USA which is as lengthy as millions of lines.

So I am never a big investor in indian IT companies as their model can be challenged any time by other emerging alternatives like china and in fact these companies have realized it some time back and now focusing for new growth avenues. Their margins are falling continuously. 

Part of the reason for not focusing on developing an innovative IT product can be indian business structure where very little equity money is available for investments in new innovative but risky products as compared to developed markets. But this can further be due to the perception about the ability of Indians to produce something unique. Some may say that now millions of dollars are being invested in ecommerce startups in india like Flipkart but there is nothing new on fact and that is why almost 99% will vanish. Most of these startups have stolen their ideas from advanced USA markets and they think that their success in USA means success in india too although we are a very different country.

Like delivery startups like Foodpanda and Localbanya; they are trying to sell us the convenience factor in delivery at home but we Indians have never cared about convenience. We are always about value for money. We are ordering on Foodpanda because it is now value for money as we are getting delivered free. So no wonder Foodpanda and Localbanya are now at the verge of closing.

But Quick heal is the answer for lack of product based companies in indian IT sector. KPIT is another one which I like. Quick Heal chose the difficult path of investing in developing a product rather than offering generic services and so now they are a brand in direct competition to MNC behemoths like AVG, Mcafee, Norton, Kaspersky and in fact they are giving these a run for their money because Quick Heal commands around 30% share of retail anti virus market in india.

As they were short of funds initially so they invested lesser in branding but in developing distribution channels across india by offering them high margins, so now they have one of the biggest distribution strength in india with around 12000 channel partners. 

Quick Heal is a 300 cr turnover company but it invests around 50 cr in R&D which is never seen in india. It is also spending around 30 cr in advertising these days. As it invests big in R&D now so its margins are falling for past few years and its NP is around 60 cr in 2015. It has grown from 170 cr to 300 cr in last 5 years which is not so fast and that is where I feel the chances of growth and reason for going for IPO is emerging.

I never invest in IPO’s as I always find them expensive. Quick heal is also expensive at a pe ratio of 40. Another thing that I look for in an IPO’s is the reason for the IPO, if  IPO proceeds are going to promoters as they are selling their stake, I take this as a big negative. But if promoters are not getting any money and in fact company is issuing new shares and the funds collected will be used for the growth of company, that is a very healthy sign of the inherent strength and growth prospects in the company.

In this IPO promoters are not getting anything only their equity investor sequoia is selling  part of their share and company will get around 250 cr for future growth. They have plan for using 111 cr for branding and 40 cr for R&D which are a big positive. Their work force is around 1500 out of which 550 is dedicated for R&D which is just great.

Quick Heal is very dominant in Home and small user segment of security but they are now focusing big on SME (small and medium enterprises) and large enterprises segment and also launched their solution “Seqrite” which can be a big surprise in the future so as their focus on cloud, Internet of things sector.

I am a bit late in posting on this as I have spent only a few hours on this. But I feel at 40 pe ratio this one is worth taking a risk as this is different from any other IT company we have seen so far and so should not be compared with them. They are offering this at 40 pe ratio may be because of no so fast growth in the recent years. Also for product based companies, PE is not the only metric to value them, turnover based valuation along with PE is the best as product based companies can quickly earn bigger percentage of their revenue as profits after they cross a critical scale. Quick Heal is investing big (around 20% of turnover) in R&D, the full benefits of which are yet to achieved; may be mainly due to lack of sales promotion and branding which it plans to invest in now. After it reaches a scale of 500-600 cr (of current products, not of any future products) we can see a big turnaround in profits.

Even if it falls after listing I would be willing to invest more into this.  I am a great believer in the strength of intellect and creativity of we Indians and have faith that we have all the muscles to compete at global scale in branded products. Digital india and growth of IT gadget are a big opportunity for security system business in india.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post)