September 07, 2006

HOV Services - Skip it

HOV Services - Exceeds Expectations?

HOV Services is a holding company and offers its services in the Finance and Accounting segment with its 6 key subsidiaries. They being in three different segments - Accounts Receivable Management, Enterprise Management Tools and Services and the third Insurance and Tax Services.

Investment Objectives

Investment for this IPO is between 81 to 97 crores depending on the pricing of the IPO, constituting to 32.3% of public shareholding.
The key objectives include planned capital expenditure (approx 25%), redeeming the units issued by its subsidiary (approx 70%), and further acquisitions

Investment Positives

The company is floated by promoters who have extremely strong background. While they are not paid any compensation for their work, they get excellent sitting fees of a lakh/month. Having read the entire prospectus, I could only find one positive aspect of investing in thi

Investment Negatives
  1. The revenue stream for the company is extremely risky, with most of its revenues coming from its top 10 clients and this figure has been increasing over the past three years. The revenues are contract based hence their pricing becomes an issue everytime the contract is up for renewal.
  2. The companys key revenues is from outsourcing and hence there will always be pricing pressure unless there is significant value addition
  3. The company has acquired other companies without having an independent valuation. This is dangerous as the company could end up buying companies at higher prices.
  4. Damages in terms of litigation exceeds 35 Lakhs.
  5. It is natural for most companies to give promoters shares at substantial discount. This company is no exception. The promoters enjoyed a fresh equity investment at the face value in January 2006. Surprisingly the same is now being offered at atleast 20 times the cost of this issue.
  6. The company is increasingly moving into the sphere of merely a pure BPO, whereing its clients save on cost when compared to their country. The reason is found in the sales mix of the company's 3 distinct subsidiaries. The share of it branded product division, EMTS, has reduced from 99% in 2003 to 12% in 2006.
  7. Also the company is increasingly looking at business in the two segments where there will be a price war with little differentiation to offer.
  8. The company has been buying out comapanies to generate its growth strategy. However, these companies have been coming at a premium now being reflected in the goodwill at which they are purchased.
  9. Two of its subsidiaries are under losses.
  10. The company's cash flow is a extremely volatile for similar incomes too. Given the nature of income that one would see in any other company, the same is just not true for this.

Strange ones

  • The company's capital structure, as usual, remains a mystery inside an enigma. Consider this-32 transactions in the last 6 months. A lot of internal transfers between companies, promoters, promoters' floated companies. The company forms companies for a specific period and transfers the stocks back to the promoters at the end of the period. The company has largely grown inorganically. There is so much confusion on the holding companies and internal transfers that after sometime, you wonder where this is all ending. This issue is anything but pure confusion on share holding. The maze of transactions can lead to false understanding of the company's promoters.
  • The company has floated options worth 5lacs to its employees creating further dilution to the capital structure.
  • The issue, inspite of being on the lower side, has solved the company to exit one of its promoters, if not undertake limited work of capital expenditure.


  1. At a networth of just over 11 crores and a book value approximately Rs. 13, the issue price is at 15 times its book value, extreme price for a stock in the BPO segment.At EPs of 5.96, the P/E works out to 33 times wheras its peers like Allsec are on the upper tens.
  2. One of the primary usage of the funds is to give the existing investors an exit route more than funding the business operations that will help the company to grow further.
  3. To me, the entire reading was like more of understanding who is the final owner of the company, rather than the business and the future of the company.
Such complex IPO's is worth a skip and that would be my choice.

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