IT Raid At IPO-Bound Domestic Mobile Handset Maker Micromax

There has been an Income-Tax raid at Micromax Informatics Ltd, the country's largest and most-watched homegrown mobile handset maker, VCCircle has learnt. According to sources familiar with the development, the Income Tax officials are carrying out their survey at the company's headquarters in Gurgaon. An email sent to Vikas Jain, Business Director, Micromax Informatics, did not elicit any response at the the time of writing this article. "We are busy in day long meeting," Micromax GM (finance) told VCCircle, when contacted. This incident could be party spoiler for the handset maker, with a cluster of marquee investors on its board, which is on its way for a public market debut. In September 2010, the company filed a DRHP with the market regulator SEBI for sale of 2.15 crore shares in its initial public offering. Its investors include Sequoia Capital (2.68%), Sandstone Capital (2.68%) and Madison India Capital (0.39%) who bought their shares from promoters Rajesh Agarwal, Rahul Sharma, Sumeet Kumar and Vikas Jain for an estimated Rs 181 per share (after accounting for subsequent bonus share allotment). TA Associates had invested Rs 100 crore in the company in December and, at the same time, bought shares from the promoters for a similar amount and currently holds 15% stake. The company relies on a business model of designing user-friendly features and sourcing low cost handsets from OEM suppliers based on those designs. It sold 70.5 lakh mobile handsets last fiscal ended March 31, 2010. Besides handsets, Micromax also sells mobile data cards for computers under its own brand to telecom service providers in India.

According to the DRHP filing with SEBI, for the year ended March'10, the company had total income of Rs 1,601 crore with net profit of Rs 200 crore. While revenues jumped 4.5 times compared to numbers for year ended March'09, its net profit rocketed 5.7 times in the same period, reflecting high margins in the business. The key to its high margins lies in wafer thin overheads with cost of products sold comprising two thirds of total sales. The company had employee cost of just Rs 7 crore with selling and distribution expense of around Rs 75 crore. The current development may have serious implications for the IPO bound company. Corporate governance issues always send out wrong signals to the institutional investors. "While such developments certainly pull down the valuations, there are a few investors who like to stay away from tainted stocks," an analyst told VCCircle on conditions of anonymity. Recently, Allied Digital, a software services firm shed over 20% of its value on reports of income tax search despite several clarifications from the company that the proceedings conducted out by IT officials at the company were part of the "routine surveys". The company had to be locked at 10% lower circuit on Monday.