PC House is planning to retire about 150 million rupees of expensive short term debt and move up rapidly expanding IT value chain business, which would increase margins and reduce operating risks, an investment banker said.

PC House once a small computer retail shop in the wayside of the Bambalapitiya junction has evolved to one of the largest computer hardware retailers in Sri Lanka

The firm now wants to raise fresh capital to venture into new business opportunities sprouting from Sri Lanka's post war economy.

The group’s chairman S H M Rishan, a former sailor who founded the business 13 years ago has transformed the company to three billion rupees business entity.

"I started (PC House) on my own with just two guys basically know people with a capital of about 28,000 USD at the beginning in 1997 we started at Bambalapitiya in front of unit Plaza small 10 by 10 feet showroom," Rishan said

"But of course as business grew we moved to Unity Plaza and we expanded from there to this level."

Public Offer

Rishan is offering 57.23 million shares to the public at 11.00 rupees per shares to raise 630 million rupees of fresh capital.

Rishan owns 90 percent PC House, while his wife, Sharmila Rishan owns the rest.

In 2010 group revenues were just over three billion rupees, and made profit of 98 million rupees or 72 cents per share.

Sri Lanka is just seeing the tip of an iceberg in a post war IPO boom with the market growing more than 44 percent to date.

The computer retailer has a trailing price to earnings (P/E) ratio of 15.3 times, while Colombo Stock Exchange has a trailing P/E of 20 times.

High-end clothes retailer Odel, which finished a successful IPO last week, had a PE ratio of 15.

NDB investment bank, the lead manager to the PC House IPO says despite falling margins from its key hardware business the groups bottom-line is expected to grow at least 20 percent year-on-year, despite declining margins.

NDB is projecting a forward PE ratio of 10.23 times earnings in 20011, 8.72 times in 2012, and 7.48 times in 2013.

"If you take a P/E ratio of 15 but the growth would be about 20 percent so the P/G to growth (PEG) ratio is much less than one," Senaka Kakiriwaragodage, assistant vice president at NDB Investment Bank told LBR.

"I think that for a tech company which is supposed to take a boom in the next few years that will be a very attractive valuation."

The computer hardware retailer made a profit of 2.7 million rupees in 2008 and 2.4 million rupees in 2009.

Kakiriwaragodage said, in 2007 PC House recorded a bottom-line of 75 million rupees, but in the following years its profitability was hit due to high financing costs.

In 2008, interest on risk-free government securities was raised to almost 22 percent by the Central Bank to tame inflation at one point touched 30 percent.

In this 'inflationary' environment banks were charging businesses over 35 percent interest on unsecured short term loans and over draft facilities.

The group plans to allocate about 160 million rupees to retire expensive short term the group had piled up in the last few years.

In June quarter 2010, the computer retailer's earnings have grown 51 percent to 806.6 million rupees, while profits have jumped 114 percent to 43.1 million rupees compared to the same quarter last year, NDB Investment said.

In June quarter hardware sales had also picked up 45 percent, giving 33 million rupees to the groups bottom-line.

"If you take the first quarter of the company in (financial year) 2010/11, compared to the previous year the same quarter they have saved about 28 million in finance costs alone," Kakiriwaragodage said.

If you annualize it will be about 100 million but if you take about after tax effects it will at least be about 50 to 60 million (rupees) bottom-line improvement solely due to finance costs reductions."

Business Diversification

PC House group is the one of the main dealers in Sri Lanka for Dell computers. The other is Softlogic Computers which is also planning an IPO.

PC House’s hardware business unit which brought in 2.8 billion rupees raked in almost 90 percent of the group's revenue in 2010.

Institutional sales account for about 55 percent of total hardware revenue, while the rest is split between retail, spare parts, upgrades and printing toner sales.

This puts the company in a vulnerably position as the company is exposed to thinning margins in the computer hardware market as price differences between branded and assembled computers continue to fall.

However the firm says hardware sales are booming and is expected to grow exponentially in the next few years which would expand its present large customer base further to mitigate business risks such as supply and demand shocks.

"We are not depending on one single customer or maybe only for few customers, we are into many segments like corporate sector, public sector and retail business, which is broken into rural and the city sales," Rishan said.

"Product wise also we have a portfolio of maybe 30 to 35 products of distribution so we will not be affected if there's any turbulence in supply, we have mitigated that risks also."

Greenwich Lanka Limited an IT physical infrastructure, systems integration and business application company was bought over by PC House in 2007.

Over the past two years PC House has been scaling up Greenwich Lanka's human capital resources to challenge to get a bigger piece of the 10 billion rupee IT support services market.

Greenwich is already showing results as 2010 profits had shot up over 360 percent to 220 million rupees.

"When an institution buys a computer what can they do with it without integration?"

Thariq Sanoon, chief of Greenwich Lanka said.

"You need the infrastructure to run PC's. In Sri Lankan most of the corporate or the government sector the infrastructure is in primitive level so definitely this growing exponentially high.

The firm says its relatively new BPO (business process outsourcing) and KPO (knowledge process outsourcing) business units would increase future margins while existing hardware business sales are expected to grow substantially.

Its BPO business unit, Procifinity Limited has already signed a contract with the department of registrations to digitally document certificates as part of the government e-governance initiative.

The group is planning a 100 seat BPO operation in Jaffna, to provide accounting and back office services to the international market.

About 300 million rupees of fresh capital raised form the IPO will go to Procifinity Limited which is 90 percent owned by the PC House Group.

There are 41 KPO and BPO's operating in Sri Lanka.

BPO exports have been growing at 31 percent over the past five years, the company in its IPO prospectus said.

"Outsourcing data centers which is something relatively new in Sri Lankan which we believe will happen in a big way here," Sarath Wickramanayake, Director at PC House said.

"Businesses are now finding that having your own data centre is just too expensive, and it makes sense for that also to be outsourced like all other non core areas in the BPO sector.

"We are not entering a brand new sector (to us), PC House is just going into areas that the IT (information technology) industry is going."

PC House IPO will open to the public on August 05, 2010.