Orient Technologies IPO analysis

Orient Technologies IPO will open for subscription on August 21, 2024 and close on August 23, 2024. We break down the IT solution provider's strengths, weaknesses, and growth prospects to help investors make an informed decision.

Orient Technologies IPO in a nutshell

• Quality : Its three-year average ROE and ROCE were 34.9 per cent and 38.3 per cent, respectively during FY22-FY24.
  
• Growth : Its revenue and net profit grew 13.6 and 11.2 per cent per annum, respectively, during FY22-FY24.
  
• Valuation : Post the IPO, the stock will be valued at a P/E and P/B of 20.7 and 2.9 times, respectively.
  
• Overview: Indian businesses, from startups to large corporations, are seeing robust growth. This necessitates IT services that will help businesses integrate their operations quickly and at lower costs. This will keep the demand for IT services buoyant, benefiting players like Orient Technologies . However, there is stringent competition amid a slowdown in developed economies that risks affecting growth. The slowdown may force large IT players to divert their focus to the domestic market, further increasing competition.

About Orient Technologies

Incorporated in 1997, Orient Technologies is an IT solutions provider with expertise across three major segments. First is IT infrastructure services, where the company sets up and manages data centres, computers, servers and storage solutions for its clients. Next is the IT Enabled Services (IteS) segment, where the company operates and provides integrated solutions to clients who, for instance, may need multiple software from different vendors. The last segment is cloud and data management, which provides services that help businesses manage their database and software online.

Strengths of Orient Technologies

• Solid demand for cloud services: The company's cloud and data management services segment is its fastest-growing vertical, whose revenue has grown impressively by 63 per cent per annum during FY22-FY24. This segment accounted for nearly 26 per cent of the company's FY24.
  
• Customer retention: Although the company doesn't enter into any long-term contracts, it has still been serving its top 10 clients for an average of 10 years. Some of its marquee clients include Coal India and Mazagon Dock. The company has not lost any of its key customers during FY22-FY24.

Weaknesses of Orient Technologies

• Domestic IT service market: Most of its revenue (99 per cent) is sourced from domestic clients. India's IT services market operates in a high-risk, low-return environment. According to Nasscom, about 40 -45 per cent of the IT service market was unorganised in FY21. This demonstrates high competition with lower billing rates, along with long tender and bidding processes for government contracts. This is why large players such as TCS, Infosys, Wipro, and HCL Tech focus more on global markets.

Risk report

Company and business

• Are earnings before tax of Orient Technologies more than Rs 50 crore in the last 12 months?
  Yes. The company reported a profit before tax of Rs 55 crore in FY24.
  
• Will Orient Technologies be able to scale up its business?
  Yes. The growing demand for AI and cloud computing has also increased the demand for IT service vendors that can provide tailor-made services. This will help the company scale up its business.
  
• Does Orient Technologies have recognisable brands with client stickiness?
  Yes. Although the company does not have any recognisable brand, it has client stickiness as it has been serving its top five clients for an average of eight years.
  
• Does the company have a credible moat?
  No. It operates in a very competitive industry with many organised players.

Management

• Do any of the company's founders still hold at least a 5 per cent stake? Or do promoters hold more than a 25 per cent stake in the company?
  Yes. After the IPO, the promoters' stake will be 73.2 per cent.
  
• Do the top three managers have more than 15 years of combined leadership at Orient Technologies?
  Yes. Ajay Baliram Sawant, the chairman and managing director, has been with the company since its incorporation in 1997.
  
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. No information to suggest otherwise.
  
• Is the company's accounting policy stable?
  Yes. No information to suggest otherwise.
  
• Is Orient Technologies free of promoter pledging of its shares?
  Yes. No shares have been pledged.

Financials

• Did the company generate a current and three-year average return on equity of more than 15 per cent and a return on capital employed of more than 18 per cent?
  Yes. Its three-year average ROE and ROCE were nearly 35 and 38 per cent, respectively. In FY24, its ROE and ROCE were 27 and 32 per cent, respectively.
  
• Was the company's operating cash flow positive during the last three years?
  Yes. The company reported positive cash flow from operations (CFO) during FY22-FY24.
  
• Is the company's net debt-to-equity ratio less than one?
  Yes. The company was net cash positive as of FY24, therefore, its net debt-to-equity ratio was negative.
  
• Is Orient Technologies free from reliance on huge working capital for day-to-day affairs?
  Yes. The business is not working capital intensive.
  
• Can the company run its business without relying on external funding in the next three years?
  Yes. Since the company generated free cash flow in FY24, it may not need to rely on external financing ahead.
  
• Is Orient Technologies free from meaningful contingent liabilities?
  No. Its contingent liabilities as a percentage of total equity was around 12 per cent as of FY24.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. After listing, the stock will offer an operating earnings yield of 6.5 per cent on its enterprise value.
  
• Is the stock's price-to-earnings less than its peers' median level?
  Yes. The company is valued at a P/E of 20.7 times compared to its peers' median of 25.9 times.
  
• Is the stock's price-to-book value less than its peers' average level?
  Yes. The company is valued at a P/B of 2.9 times compared to its peers' average of 5.4 times.

Disclaimer: This is not a stock recommendation. Investors should do their due diligence before investing.

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