IPO Review Rating matrix Rating : Unrated Issue Details Issue Opens 8-Feb-16 Issue Closes 1-Feb-16 Issue Size ( Crore) 445-451 Price Band ( ) 311-321 No of Shares on Offer (crore) 1.4 QIB (%) 5 Non-Institutional (%) 15 Retail (%) 35 Minimum lot size (No. of shares) 45 Objects of the Issue Objects of the Issue Advertising and sales promotion Capital expenditure on research and development Purchase, development and renovation of office premises in Chennai, Kolkata, Pune and New Delhi Shareholding Pattern Amount 111. crore 41.9 crore 27.6 crore Pre-Issue Post-Issue Promoter & promoter group 87.6% 72.9% Public/others 12.4% 27.1% Financial Summary Crore FY12 FY13 FY14 FY15 H1FY16 Total Revenue 184.7 214.8 252.6 294.3 152.3 EBITDA 95.7 15.2 14.4 91.8 44. EBITDA (%) 51.8 49. 41.3 31.2 28.9 Diluted EPS 9.7 11. 8.3 7.7 3.5 Valuation Summary (at 321; upper price band) (x) FY12 FY13 FY14 FY15 H1FY16* EV/EBITDA 22. 2. 2.2 22.9 23.9 P/E 33. 29.2 38.5 41.8 46.4 *Annualised Research Analyst Abhishek Shindadkar abhishek.shindadkar@icicisecurities.com February 8, 216 Quick Heal Technologies Ltd Price band 311-321 Quick Heal Technologies (QHT) is one of the leading providers of security software products and solutions in India with a market share of over 3% in the retail segment. The company s portfolio includes solutions under the brand names Quick Heal and Seqrite for desktop and laptop security, mobile/smartphone security, endpoint security, gateway security, network security, cloud-based mobile device management (MDM) systems, data loss prevention (DLP) systems and family safety software. QHT has successfully installed 24.5 million+ licenses products since incorporation and has over 7.1 million active licenses spread across more than 8 countries, as of December 31, 215. Investment Rationale Large portfolio of easy-to-use, high-quality solutions QHT provides high-quality feature-rich security software solutions for home users, enterprises, educational institutions and government customers that can be deployed or accessed with minimal effort and limited technical knowledge, are user-friendly, effective, efficient and endeavour to offer a superior user experience. It offers a broad range of security software solutions under the brand names Quick Heal and Seqrite. The solutions have earned a variety of awards and certifications from industry groups and publications including AV-Test and OPSWAT. These security software solutions are available across multiple price points. QHT s R&D team works on regular feedback shared by users and tracks various evolving security threats to define, improve and customise solutions to meet the users security requirements. Recognised brand with reputation The company has a proven track record of execution over two decades, which has contributed to its reputation and leading market position in India for providing security software solutions. Quick Heal and Seqrite brands are widely recognised across India and the company continues to invest in various brand building initiatives. QHT has also grown its user base through its solutions offerings and end users trust via its ability to protect their data and systems. QHT was recognised as India s No. 1 antivirus vendor by the DQChannels Channel Satisfaction Survey 215. In addition, QHT s product for small and medium businesses (SMBs), Seqrite Endpoint Security, was awarded the IMC IT Award in the category of IT products for Small and Medium Enterprises in 215. Concerns Inability to anticipate technological advances could have material impact Loss of tax incentives could impact profitability Security software is a highly competitive and price sensitive market Customer concentration risk Adverse changes in channel partner relationships could impact business model Adverse ruling in outstanding litigation could have material impact Priced at PE multiple of 4.5x FY15 EPS on lower band; 41.8x on higher band At the IPO price band of 311-321, the stock is available at a multiple of 41.8x FY15 EPS at the upper end of the price band.
QHT categorises sales as retail sales (86.8%) and other sales (13.2%). Retail sales are all sales, other than generated across enterprise channel partners, government partners, mobile channel partners and sales outside India. The company reports revenues across two geographic segments, within India (97.3%) and outside India (2.7%) Company Background Incorporated in 1995, QHT is one of the leading providers of security software products and solutions in India with a market share of over 3% in the retail segment. QHT sells its solutions directly and through distributors, referred as channel partners, who in turn distribute solutions through resellers and conducts its sales and marketing activities out of 64 offices and warehouses across 36 cities in India, and through its subsidiaries in Japan, Dubai, the United States and Kenya. Company s end customers include home users, small offices and home offices (SOHO), SMBs, enterprises, educational institutions, as well as government agencies and departments. QHT s proprietary antivirus technology, which is based on an innovative behaviour and threat detection system, works to detect security threats including virus and malware attacks in real time to protect users IT assets across platforms, including Windows, Mac, Android, ios and Linux, and across devices, including desktops, laptops, mobile/ smartphones and tablets, while aiming to ensure resource availability, business continuity and an uninterrupted digital experience. Financial Performance Quick Heal s revenues have grown at 17% CAGR over FY12-15. QHT reported absolute EBITDA of 91.7 crore in FY15 translating to EBITDA margins of 31.2%. During H1FY15, QHT reported revenue, EBITDA and EBITDA margins of 152 crore, 44 crore and 28.9%, respectively. Exhibit 1: Revenues post 17% CAGR in FY12-15 crore 35 3 25 2 15 184.7 214.8 252.6 294.3 152.3 1 5 - FY12 FY13 FY14 FY15 H1FY16 Total Revenue Source: RHP, Company, ICICIdirect.com Research Exhibit 2: EBITDA and EBITDA margins (%) trends crore 12 51.8 49. 41.3 1 31.2 8 28.9 6 4 2 95.7 15.2 14.4 91.8 44. FY12 FY13 FY14 FY15 H1FY16 EBITDA EBITDA Margin (%, RHS) Source: RHP, Company, ICICIdirect.com, Research 6 5 4 3 % 2 1 Exhibit 3: Profit after tax trends crore 1 75.7 76.9 8 68.2 6 53.8 4 24.2 2 - FY12 FY13 FY14 FY15 H1FY16 PAT Source: RHP, Company, ICICIdirect.com, Research Page 2
Exhibit 4: Return ratios, RoCE & RoE 5 43.2 % 4 3 2 1 32.4 35.2 27. 27.2 22.8 18.7 2.1 16.2 15. - FY12 FY13 FY14 FY15 H1FY16* RoCE RoE Source: RHP, Company, ICICIdirect.com Research Page 3
Strategies: Increasing awareness and concerns related to cyber crimes The India IT security market was valued in excess of 5, crore in 213 and is expected to reach 6,6 crore in 215 with hardware, software and services contributing 2%, 23% and 57%, respectively and 8, crore by the end of 217 led by rapid 1) adoption of smart devices, 2) adoption of IT security solutions and services by enterprises, and 3) growing number of cyber crimes. Internet users in India are likely to reach 5 million by 217 from >35 million in June 215 led by rising adoption of smartphones, which could drive the next wave of internet penetration in India. Smartphone users have grown 55% to reach 14 million in 214 and account for ~15% of total mobile subscriptions in India and 11% of the Indian population. Note, the number of mobile internet users in India is expected to rise to 314 million by 217, double the 159 million in 214 and could further augment internet traffic as 65% of India s internet traffic as of May 215 was driven by mobile devices. A 15% YoY growth in number of SMBs (51 million in FY15) could also drive spending as they could constitute 3% of the Indian IT market. In terms of technology adoption, SMBs are likely to spend ~ 71,3 crore in 215 on IT products. By 22, this expenditure could rise to 154,8 crore growing at a CAGR of >16%. Finally, the growing market for security software solutions in India could also be driven by rising number of cyber-crimes that are expected to increase 1% YoY and reach 3, in 215. Exhibit 5: Internet users trends 55 5 millions 44 33 22 19 257 354 11 Jun-13 Jun-14 Jun-15 217E Internet users Page 4
Exhibit 6: Growth in smartphones and mobile internet users in India 375 339 314 millions 3 225 15 9 13 14 159 218 175 236 75 213 214 215E 216E 217E Growth in smartphone Mobile internet users in India Exhibit 7: Product segments - IT security market Operates across all segments of IT security market The IT security market comprises mobile device management (MDM), unified threat management (UTM), end point security (EPS) and retail. Quick Heal Technologies offers solutions across all four of these segments and is a market leader in the retail segment, which is likely to grow at a faster clip during 215-217E. 2-25 15-18 crores 55-65 4-5 3-4 4-5 3-35 2-25 13-17 8-11 3-5 9-125 6-8 4-6 1-13 EPS UTM MDM Retail Total 213 215 217E Exhibit 8: Growth rates across segments Time Frame EPS UTM MDM Retail CAGR (%) 213-215 1-15 15-2 45-5 1-15 215-217E 1-15 15-2 25-3 2-25 and is market leader in retail segment! QHT is one of the leading providers of security software products and solutions in India with a market share of >3% in the retail segment. The company has successfully installed 24.5 million+ licensed products since incorporation and has over 7.1 million active licenses spread across more than 8 countries, as of December 31, 215. QHT s licence sales have grown at 2.8x in FY11-9MFY16 driven by 1) a large distribution network of channel partners, 2) user friendly software solutions structured in a way Page 5
that it can be accessed, installed and used with minimal effort and limited technical knowledge, 3) support services provided to end users in English, Hindi and several other major regional Indian languages, 4) sales and marketing activities that benefit from word-of-mouth recommendations from large user network and 5) continuous R&D investments and in-house development. Exhibit 9: Growth in paid licence millions 8 6 4 2.5 3.3 2.8x 4.4 5.5 6.3 7.1 2 FY11 FY12 FY13 FY14 FY15 9MFY16 Growth in paid licences Source: Company, ICICIdirect.com Research QHT s distribution approach allows it to maintain connectivity with end users, including key enterprise accounts and helps support channel partners while leveraging their distribution reach and capabilities Strong and diversified channel network QHT sells its solutions directly and through distributors, whom it refers to as channel partners, who in turn distribute through resellers. The company has established strong, sustainable and long-term relationships with its channel partners and also has a strong internal sales and marketing team comprising 4 employees who work closely with channel partners to identify new sales prospects, sell solutions and provide after-sale support. As on December 31, 215, the company had a network of over 19, retail channel partners, 349 enterprise channel partners, 319 government partners and 944 mobile channel partners. End users such as enterprises, educational institutions and government customers purchase QHT s solutions either directly, through enterprise channel partners as well as through 3 system integrators who package QHT s solutions as part of their overall product offering. The company believes its distribution model helps deliver its solutions to a large addressable market, distributed across a broad geographic spectrum, at a low cost. Exhibit 1: Sales and marketing (S&M) employee strength 45 4 375 3 265 312 x 225 15 75 166 FY13 FY4 FY15 9MFY16 S&M employees Source: RHP, Company, ICICIdirect.com Research Page 6
Widely recognised driven by track record and brand building initiatives QHT s reputation and market leading position in security software solutions has been driven by 1) a proven track record of execution over two decades and 2) brand building initiatives. The company advertises across a number of newspapers and magazines in English and other major regional Indian languages, top national news and entertainment TV channels, and FM radio channels in India to enhance its brand name and reputation. Advertising and sales promotion expenditure as a percentage of revenues was at 5.9%, 9.8%, 8.8% and 8.9%, for H1FY16, FY15, FY14, FY13, respectively. The company believes spends to maintain build, and enhance brand could increase in future as a high degree of brand recall plays a key role in distinguishing its solutions from those of its competitors. This, in turn, could contribute significantly to the growth of its business, as it has done in the past, and is expected to do in future. Significant R&D and technology capabilities The market for security software is intensely competitive and characterised by rapid changes in technology, user requirements, industry standards and frequent new product introductions and improvements. QHT has strengthened its R&D capability continuously by expanding its R&D team increased to 547 employees in 9MFY16 vs. 191 in FY13 with relevant skills and expertise. A strong R&D focus and efforts to design, innovate and customise solutions with latest technology that respond to end users need has been a key driver of the company s revenue growth. Exhibit 11: Research and development (R&D) employee strength 6 547 5 433 x 4 3 2 191 318 1 FY13 FY4 FY15 9MFY16 R&D employees Source: RHP, Company, ICICIdirect.com Research Exhibit 12: Financial Summary Crore FY12 FY13 FY14 FY15 H1FY16 Total Revenue 184.7 214.8 252.6 294.3 152.3 EBITDA 95.7 15.2 14.4 91.8 44. EBITDA Margin (%) 51.8 49. 41.3 31.2 28.9 Depreciation / Amortisation 2.1 4.4 1.8 2.2 11.4 Tax 31. 33.6 27.6 26. 12.5 PAT after exceptional items 68.2 76.9 58.4 53.8 24.2 Diluted EPS 9.7 11. 8.3 7.7 3.5 RoCE 43.2 35.2 27.2 18.7 2.1 RoE 32.4 27. 22.8 16.2 15. Source: RHP, Company, ICICIdirect.com Research Page 7
Key risks and concerns Inability to anticipate technological advances could have material impact Inability to anticipate technological advances, retain & recruit qualified and talented R&D staff and develop innovative solutions for users, which meet their requirements in a timely and cost-effective manner will have a significant effect on our results of operations. Loss of tax incentives could impact profitability Third-party vendors manufacture CDs and DVDs for QHT at its manufacturing facility in Rudrapur. This facility is entitled to avail an excise duty exemption till June 2, 218, which, in effect, lowers the cost of manufacturing. This excise duty exemption is valid for 1 years from the date of the government notification or the commencement of commercial production, whichever is later. Termination or change in contract, and change or loss of excise duty exemption could effectively increase manufacturing costs, and would have an adverse impact on profitability. Further, introduction of a comprehensive national Goods and Services Tax (GST) regime could eliminate excise duties and may increase the cost of manufacturing CDs and DVDs depending on the rates proposed, thus affecting QHT s financial performance. Security software - highly competitive and price sensitive market The security software solutions market is intensely competitive and characterised by rapid changes in technology, user requirements, industry standards and frequent new product introductions and improvements. Further, security protection is increasingly being offered by third parties at significant discounts to QHT s prices or, in some cases is bundled for free. Widespread inclusion of lower-priced or free products that are perceived to perform the same or similar functions as QHT s products within computer hardware or other companies software products could potentially reduce the need for QHT s products or render its products unmarketable. The company faces competition from competitors like AVAST and AVG which provide several freemium products especially to those users who are sensitive to pricing. Competitive pressures could lead to increase in advertising and sales promotion expenses, thus impacting margins. Customer concentration risk Quick Heal depends heavily on sales of its Quick Heal branded solutions to home users. Though the company is working on diversifying revenues, any factor adversely affecting sales of its solutions to home users; its inability to retain existing customers or attract new customers will negatively impact company s profitability. Adverse changes in channel partner relationships may impact business model The company relies significantly on its channel partners to sell and support solutions. A significant percentage of revenues are generated through this model. Adverse changes in the channel partner network or relationships with channel partners could adversely affect the quantity and pricing of the solutions offered which in turn could materially impact QHT s business model. Adverse ruling in outstanding litigation may have adverse impact... An adverse ruling on outstanding proceedings at different levels of adjudication before various courts, tribunals and appellate authorities could have a material impact on QHT s performance. Page 8
Financial Summary Exhibit 13: Profit and Loss Statement ( Crore) FY12 FY13 FY14 FY15 H1FY16 Revenue from operations 179. 25. 242.8 286.1 148.2 Other Income 5.7 9.8 9.8 8.2 4.1 Total Revenue 184.7 214.8 252.6 294.3 152.3 Raw material / Purchase of security software 8.5 9.5 11. 15.8 7.6 Employee benefits expense 2.7 28.6 43.4 64.1 41.7 Operation and other expenses 54.1 61.8 84.1 114.4 54.9 Total Operating Expenditure 83.3 99.8 138.5 194.3 14.2 EBITDA 95.7 15.2 14.4 91.8 44. Interest - - - - - Depreciation / Amortisation 2.1 4.4 1.8 2.2 11.4 EBIT 99.2 11.5 13.4 79.8 36.7 Tax 31. 33.6 27.6 26. 12.5 PAT 68.2 76.9 75.7 53.8 24.2 Exceptional item (17.3) PAT after exceptional items 68.2 76.9 58.4 53.8 24.2 Diluted EPS 9.7 11. 8.3 7.7 3.5 Exhibit 14: Balance Sheet ( Crore) FY12 FY13 FY14 FY15 H1FY16 Equity Capital 7.6 7.6 61.1 61.1 61.1 Reserve and Surplus 22.7 277.3 271.3 27.4 294.7 Total Shareholders funds 21.3 285. 332.4 331.4 355.8 Non current liabilities (total).4.5 - - - Trade payables 14.3 2.7 29.1 37.4 34. Other current liabilites 2.6 4.3 5.3 7.5 9.5 Short term provisions 2. 3.5 13. 51.7 3.5 Total current liabilities 18.9 28.6 47.3 96.5 47. Liabilities Total 229.6 314.1 379.7 428. 42.8 Fixed Assets 42.7 67.4 137.2 184.8 198.9 Tangible 18. 31.4 63.3 1.2 138.9 Intangible.9 7. 18.5 1.9 1.6 Intangible under development 23.8 29. 55.4 73.8 49.3 Non-current Investments - - -.4.4 Deferred tax asset - - 3.9 4.9 5.3 Long terms loans and advances 9. 1.6 15.6 17.2 14.9 Other non-current assets..1..1.1 Total non-current assets 51.8 78.1 156.8 27.4 219.6 Current investments 1.1 139.4 131.4 129.6 95.9 Inventories.6 2.3 6.2 7.8 6.9 Trade receivables 65.7 77.3 69.4 64.8 57.5 Cash and bank balances 7.5 1.3 9.5 12.6 1.5 Short term loans & advances 3.7 6.6 6.2 5.5 8.4 Other current assets.2.1.2.2 4. Total Current Assets 177.8 236. 222.9 22.5 183.3 Net current assets 159. 27.4 175.6 124. 136.2 Assets Total 229.6 314.1 379.7 428. 42.8 Page 9
RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/2% for large caps/midcaps, respectively, with high conviction; Buy: >1%/15% for large caps/midcaps, respectively; Hold: Up to +/-1%; Sell: -1% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai 4 93 research@icicidirect.com Page 1
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Please note, ICICI Securities Ltd has been appointed as one of the Lead Managers to the public issue of QuickHeal Technologies. This report is prepared on the basis of publicly available information. Page 11