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Tech Solution Limited

By Marketing Research Team, 3EA
Tech Solution Limited

The gist of case is as under:

A mid-size Software Company, with good track record, faces problems because of the global reasons. It consolidates itself and focused on core competence and sailed through the bad time.

Now, it aims to expand with two investment opportunities each having its own justifications.

The company has options to raise the funds and each option has its merits and demerits. There are certain non-financial considerations attached to each source.

The company has to choose the best possible course of actions, both on investment decision and resource mix, in order to achieve the goal of long term sustainable growth.

ACADEMIC NOTES
The case is on subject of FINANCIAL MANAGEMENT. It specifically covers following aspects of financial management;

  • Capital Budgeting and Cost of Capital
  • Relative merits and demerits of different sources of long-term finance
  • Capital rationing
  • Valuation of equity

Over and above the general aspects are as under:

  • The future prospects of software industry
  • The management practice in the past especially with finance management.

TECH SOLUTIONS LIMITED

INTRODUCTION

TECH SOLUTIONS LIMITED is an existing company established in 1998, engaged in providing customized solution for different industries and also technical support personnel for on-site requirements. It is based at Pune.

The company is promoted by Mr. X and Mr. Y, both technocrats, having more than a decade experience with well-known software giants in USA.

BUSINESS

The company started its business in 1998. Initially, it developed customized commercial applications for SMEs. It also made all application web enabled and accordingly upgraded its skills in terms of manpower and equipments.

In 1999, it ventured in off shore business by providing software consultants for its off-shore clients' on site requirements. In 2000, it explored the potential in e-governance software development for various Govt. authorities.

FINANCIALS

The company started with small equity of Rs. 10 crores, mainly contributed by the promoters and their family members. It also borrowed by way of equipment finance from the bank for creating facilities. The loan was partially repaid over a period of time.

The company earned net profit of Rs. 3 crore in 1st year itself and it raised to Rs. 27.50 crores in 2001. The summarized financial statements are given in Exhibit 1

RECENT PAST

The global software debacle, post WTC in Sept 01, also adversely affected Tech Solution. The constant fall in man month rate as well as reduced flow of fresh orders brought down the top line and consequently the operating result was negative. Further, the receivable reached to as high as 11 months and the company had to borrow working capital at higher interest to service and maintain existing facilities.

In the year 2003, company consolidated its position. It concentrated on the domain expertise, focused local e-governance contracts and also developed few products of BPO services. As a result it came in black soon.

FUTURE PLAN

The company has got two investment proposals, each requiring Rs. 50 crores of capital out flow. One is to create new facilities at different geographic centres and marketing set up for domestic business. The another is take certain existing companies, both Indian and foreign, who have good potential but could not withstand the adverse situation and they are available at competitive valuation. The Project Cash inflow / out flow together with their relevant NPV and IRR are given in Exhibit 2.

FUNDING ALTERNATIVES

A leading private equity firm is interested in the company to invest Rs. 40 crores. It values the company's equity at Rs. 135 crores and wish to have 30% stake in the company. The other terms of such funding shall be nomination on the board of the company, restriction on the policy decisions, and comfortable exit route after 3-5 years, for private equity partner with expected rate of return of at least 20% to them. The fund raising cost is 3%.

Alternatively company can go for IPO in view of favourable market conditions. As per the merchant bankers' expectation, the minimum dilution 25% in order to make listing, the company can get Rs. 50 crores, valuing the total equity at Rs. 200 crores. The cost of IPO is estimated at 8 to 9%.

The company can also deploy Rs. 10 to 12 crores hoping to realize the overseas receivables.

ISSUES

The company management is deliberating following issues.

  • Whether the company should undertake expansion plan.
  • Whether it should undertake both plan and one after another and in what order
  • What source should selected for funding the plan

Exhibit 1

Summarised Profit and Loss Accounts for March ending

Summarised Balance Sheet (as at 31 March)

Exhibit 2

CASH FLOW STATEMENT

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Case Study by: Marketing Research Team, 3EA