ICRA Limited (“ICRA”) has assigned an IPO Grade ‘1’ indicating poor fundamentals to the proposed initial public offering of Allied Computers International (Asia) Limited. The assigned grading reflects the company’s small size of operations and marginal presence in a fiercely competitive industry dominated by large players, including multinationals, who have far superior technical capabilities, brand recall, distribution network and financial strength.

While the company has achieved satisfactory sales growth in the segment in which it operates on the basis of an acceptable product quality, distribution network and price competitiveness, the sustainability of the same, going forward, remains to be seen. The size of the proposed project is large in relation to the existing asset base and accruals of the company, and the grading is also constrained by project implementation risks inherent in a project of this magnitude, including its ability to market the products post completion of the project.

The company is promoted by first generation entrepreneurs with limited financial flexibility to fund any contingencies that may arise. While the company’s operations have been profitable, cash flow from operations have been mostly negative, primarily on account of high working capital.

ICRA, however, notes that the company is operating in an industry which has high growth potential and is promoted by a technocrat with experience in this business line.ICRA assigns IPO gradings on a scale of 1-5, with Grade 5 indicating strong fundamentals and Grade 1 indicating poor fundamentals.

An ICRA IPO Grade is a symbolic representation of ICRA’s current assessment of the fundamentals of the issuer concerned. The fundamental factors assessed include inter alia industry risks, business and financial position of the entity, project risks, prospects and management quality. Such an assessment involves a comparison both with the peers and with other listed equity securities.