Business Times

IT stocks – Sri Lanka’s next big thing?

By Jagdish Hathiramani

Amidst a burgeoning number of initial public offerings (IPOs) slated for sectors such as hotels, power and energy, finance, healthcare and food; a new category is also gaining interest in the public eye: the IT sector.

With recent reports of Environmental Resources Investments bullish foray into the IT sector this month, including a Rs. 100 million invested into data centre and network systems integrator Enterprise Technology (Pvt) Ltd and Rs. 300 million sunk in the leisure industry IT company Olancom, formerly RoomsNet International; the IT sector may prove to be the next panacea targeted by savvy investors. All that has been missing for the area to truly capture the public's interest may be this week's launch of PC House's IPO, scheduled to open for subscription on August 5, 2010.

This Rs. 2.8 billion revenue company plans to raise close to Rs. 629.5 million in funds from the sale of 57,233,334 new ordinary shares at Rs. 11 per share, a total of 25% of its equity. And when listed it will become a company with a market capitalisation of Rs. 2.5 billion. The prospectus of this share issue indicates that the majority of funds (Rs. 195 million) will go towards retiring so-called expensive debt and financing working capital requirements across the three companies forming the PC House group, while some funds will also be set aside for branch expansion (Rs. 32 million) and establishing new product affiliations and improving service quality (Rs. 70 million). Additionally, it was revealed that upgrades to outsourcing (Rs. 100 million) and data centre (Rs. 200 million) operations would account for the rest of IPO funds. Meanwhile, IPO costs entail an expenditure of Rs. 32 million.

Citing Business Monitor International's 2010 Sri Lanka Technology Report amongst others, PC House's IPO prospectus indicates double digit growth forecasts across the hardware, software and IT services areas of the IT sector through to 2014. It also suggests potential growth in technology adoption with individuals, in the case of desktop computers, internet and broadband, as well as at schools. In the meantime, specifically, PC House has also indicated that its own future prospects would include the opening of four retail outlets in 2010, adding to its existing network of 28 outlets island-wide, as well as setting up a 100-seat finance and outsourcing venture in Jaffna. It also indicates that four potential clients from USA and UK are interested in signing up for its outsourcing services.

This would be in addition to a current Sri Lankan government contract to digitise birth, marriage and death certificates, serviced by a 200-seat operation. Also targeted is a share of the Internet data centre space which is currently inhabited by Sri Lana Telecom, Dialog and Suntel, where PC House suggests its software development capabilities will allow value additions which its telecommunications -centred competitors cannot offer.

However, while recent examples of successful IT companies with Sri Lankan links include MillenniumIT and Virtusa, both of which are not available to local investors because they are listed on the LSE and NASDAQ respectively; it is in fact only locally listed E-channeling which stock analysts have as an indicator for the potential of IT stocks at the Colombo Stock Exchange. E-channelling is a stock not known for its strong results. Meanwhile, the outsourcing industry also has few true success stories despite estimates of 41 companies currently operating locally. Additionally, it has also been observed that it is more likely that an investor will decide whether to buy a stock based on company-specific criteria, rather than sectoral indicators.

So, while the first true IT IPO sways the market to prefer this sector over any other, there is always hope for the second and third. This as the sector also aims for its goal of becoming a US$ 1 billion industry by 2016.

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