IPO Analysis: Virtusa - Success In IT Consulting

| About: Virtusa Corporation (VRTU)

Virtusa (NASDAQ:VRTU) is an information technology service company that uses an offshore delivery model to provide services such as IT consulting, technology implementation and application outsourcing. On March 31, 2007 the company had 3576 employees.

Virtusa provides IT services primarily to following industries:

  • Communication and technology
  • BFSI (Bank, financial services and insurance)
  • Media and information

  • Some of its many clients include:

  • Aetna life insurance company (NYSE:AET)
  • BT (NYSE:BT)
  • ING North America Insurance company (NYSE:ING)
  • International Business Machines Corporation (NYSE:IBM)
  • JPMorgan Chase Bank (NYSE:JPM)
  • Its competitors mainly include:

  • Other offshore IT services providers such as HCL technologies, Infosys (NASDAQ:INFY)
  • In-house IT departments.

  • Revenue

    Virtusa drives its revenue from various services like IT consulting, technology implementation and application outsourcing. It provides services based on both time and material as well as fixed price basis. Revenue from fixed-price contracts accounted for 14% of revenue in FY 2007.

    The company works with on site-to-offshore service mix, in which one team interacts directly with the client at client's location (USA ,UK etc) to understand its problems and requirements. The on site team communicates this information to the offshore team which in turn develop and deliver required solution/service from an offshore location (India etc).

  • In the last two years the company services mix of on site vs offshore stands at nearly 17% on site, and the rest offshore.
  • Revenue from on site - offshore resources stand at 40% and 60% in FY 2007 and 47% and 53% in FY 2006.
  • Top ten clients account for 72% of business in FY 2007
  • Repeat business accounts for nearly 97% of company's revenue, portraying the high level of satisfaction among customers.
  • BT is the company's largest client, accounted for 23% revenue in FY 2007.

  • Net revenues attributable to geographic regions based on location of the customer


    Business/Company Outlook

    Off shoring of IT services is expected to continue not only because of cost advantage but mainly due to availability of required skills and quality of services. The growth of the company depends on growth of industries or verticals to which company provides its services and also on management's capabilities in the following areas:

  • Finding new verticals/industries to serve.
  • Attract and retain talent.
  • Attracting new customers
  • Expand existing relationships
  • The main concerns for the company's future include adverse currency movements and any slowdown in customer industries.


    Company revenues have shown significant growth, from $24 million in FY 2003 to $124 million in FY2007. Also, during this period the company turned around and showed an operating profit of nearly $14 million in FY 2007 from a operating loss of $2.4 million in FY 2003.

    Virtusa's balance sheet is healthy and will strengthen further if this offering gets through.

    Cash vs Market cap

    Before this offering Virtusa had nearly $44 million of cash in books and if this offering settles at $14 per share, the company will get additional cash amounting to nearly $50 million. That leaves company with nearly $94 million of cash and almost no debt after the offering and nearly $319 million of market cap if issue is settled at $14 per share.

    Valuation/Offer value

    At offer price of $15 per share, company shares are available at current PE of nearly 25 [taking operating profit as base] which is reasonable due to the following factors:

  • Growth which company has shown in past.
  • Highly impressive clientele.
  • Healthy balance sheet.
  • We rate this IPO 2+ on scale of "1 to 5" (5 for best)


  • High dependence on few clients.
  • Dollar has shown steep decline against other currencies. Due to geographical mix of company's business this decline can hit company hard.
  • Competition is rising.
  • Due to high number of employees in IT industry the dilution of equity capital due to employee stock options plans is much higher in IT industry than in other industries.

  • Advantages

  • Long-term contract with BT signed in March 2007.
  • Global presence
  • High growth in past
  • Global delivery model.
  • Healthy balance sheet.
  • Cash in bookings is enough for company to consider a big acquisition.
  • Strong balance sheet will also help company to easily get through any difficult times for business caused by global slowdown, adverse currency movements, loss of any major client.
  • Funds raised from this offering will be utilized by the company as against other recent offerings which just presents an exit route to existing owners of the company.
  • Disclosure: This article reflects personal view of the author about the company and one must read offer prospectus and consult its financial adviser before making any investment decision.

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