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NEW ISSUE MONITOR

Accel Frontline

Domestic-oriented and hardware-heavy

Track record not encouraging

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CM RATING

38/100

Accel Frontline is an information technology (IT) service provider specialising in consulting, infrastructure, applications, outsourcing and support services. Started as Accel Automation Pvt Ltd in 1991 by providing multi-vendor services for computers systems and repair services, the company reorganised itself as Accel ICIM Systems and Services in 2000 after it acquired the systems and engineering services division of Fujitsu ICIM. In 2004, Accel Frontline forged a strategic alliance with Singapore-based Frontline Technologies Corporation and, subsequently, changed the name to Accel Frontline from 3 November 2005 to reflect the new direction to adopt the business model of Frontline in IT Infrastructure Solutions and Services.

Accel Frontline’s business model has evolved over the years from being a computer maintenance service provider to a total IT-solutions company. It had an employee-strength of 2,012 employees end March 2006, with an attrition of 25.65%. The company has structured its business by carving out four strategic business units: IT Infrastructure Solutions (IIS), contributing 55% (70% in FY 2004); IT Infrastructure Management Services (IMS), contributing 30% (22% in FY 2004); Enterprise Software Solutions (ESS), contributing 5% (8% in FY 2004); and Business Process Outsourcing Services (BPO), contributing 7% (2% in FY2004).

The funds from the issue of fresh equity shares are to be utilised to fund Accel Frontline’s global business expansion plans including development of overseas marketing and sales infrastructure and to acquire or invest in strategic businesses in the US, Middle East and the Far East, totalling Rs 30 crore; increasing the ESS and BPO capacities by expanding existing facilities by 500 seats each amounting to Rs 9 crore; and meeting the requirement of working capital requirements and general corporate expenses amounting to Rs 20 crore. The shortfall will be met by internal accruals and existing financial arrangements.

Strengths

• Accel Frontline is positioning itself as a total IT service provider and is exploring the international markets from its experience in the domestic market. The strategic tie-up with Frontline Technologies Corporation will give it the expected experience for international markets.
• Accel Frontline has a pan-India presence with 92 premises (and support centres) in 86 locations.

• For the BPO division, Accel Frontline is dependent on two multinational customers and about 59% of the BPO revenue comes from these select clients.
• The dependence on government and public sector units is substantial in the current business turnover. The turnover shows an uneven trend among quarters.
• About 55% of the revenue accrues from IT Infrastructure Solutions, which is a low margin business (essentially involving trading in hardware).
• The track record is not encouraging, with volatile profit and declining sales till FY 2005. It was only in FY 2006 that sales and profit jumped. Cash flow from operating activities has been negative in three out of the last five years and cash flow after considering investment in fixed assets has been negative in all the five years.

Valuation

FY 2006 EPS on post-IPO equity works out to Rs 4.3. At the price band of Rs 75 – 90, PE is 17.5 to 21. The comparative listed players in similar business like CMC trades at 20 and HCL Infosystems at 9 times. But they are much bigger in size compared with Accel Frontline. Considering the nature of its business (mainly domestic-oriented and hardware-heavy), Accel Frontline should get P/E of around 10 in a normal market.