Quick Heal Technologies - IPO Note - Angel Broking

Quick Heal Technologies (QHTL) is a dominant player in the growing Retail IT Security software market in India with a market share of 30% and an active license user base of 7.13mn. ~87% of its customers are retail clients while the balance is made up of enterprises and government institutions. The company has laid the foundation in terms of product development, creating infrastructure for distribution and built a brand to further grow its overall business.

Leadership position in growing Retail IT Security market: The Indian IT Security software market is estimated to be at Rs. 1,500-1,800cr in 2015, of which, the retail market accounts for ~Rs. 600-800cr. The retail market has grown from ~Rs. 400-600cr in 2013 and is expected to post a CAGR of 20-25% over 2015-17E on the back of growing number of internet users. QHTL is best placed to benefit from the growing industry on the back of its brand visibility along with its wide distribution reach.

Strong distribution network with good brand equity: Despite facing competition from international as well as domestic players in India, QHTL has been able to successfully grow its business and establish a strong position across India on the back of its 19,000 retail channel partners. QHTL has also built support systems that include mobile, enterprise and government channel partners. The company has historically spent ~10% of its top-line on advertisement and is expected to allocate ~Rs. 111cr from the IPO proceeds (over three years) to further improve its visibility, which in turn, will aid growth.

Debt free with healthy Cash Flow generation for future R&D needs: QHTL has a debtfree balance sheet and cash balance of ~Rs. 107cr as of 1HFY2016. Over the past five years, QHTL is generating strong operating cash flows which have grown from ~Rs. 49cr in FY2012 to ~Rs. 77 in FY2015. We believe that the company generates sufficient cash flows to cover for R&D and technology up-gradation related expenses.

Outlook Valuation: QHTL has shown significant growth over FY2012-15, posting a revenue CAGR of 16.9% while its profitability has declined from Rs. 68cr in FY2012 to Rs. 54cr in FY2015 as the company was in an investment phase. Investments were incurred towards new product development for its Enterprise business and brand building.

On the valuation front, at the upper end of the price band, the pre-issue P/E works out to 41.2x its 1HFY2016 annualized earnings which we consider decent taking into account the company's brand image. Further, the company is confident of it being able to sustain its growth trajectory owing to its strong distribution network. Additionally, there is a two-year lead-lag on product development for the Enterprise business of which the company will reap benefits in future. Thus, we recommend a Subscribe on the issue from a longer term perspective.

Source : Equity Bulls

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