<India StockWatch>-Sure and steady flow the gains-TATA Infotech Ltd.
(Source:Smart Investor-Business Standard)
Tata Infotech offers enough scope for appreciation even now, after appreciating over 100 per cent in 1998, says Shalini Gupta
In 1998 the Tata Infotech scrip returned over 100 per cent to its shareholders. Does the company merit a buy at its present price of Rs 1653? The Smart Investor takes a look.
A healthy product mix: Tata Infotech has a sensible mix of domestic and export presence — the exports to domestic revenue ratio was 2:1 in 1997-98. For the nine months ending December 1998, the ratio has gone further in favour of exports — it stands at 2.2:1. Exports offer better margins than domestic business and hence the shift is favourable to the company.
However, a domestic presence provides the canvas to develop domain expertise (expertise of certain industries; this, software industrymen feel is now necessary for bagging contracts in certain industries since the requirements of each industry are unique and competition is very tough internationally).
Such a mix of domestic and export presence, say analysts, is therefore very healthy for the long run. In fact, Tata Infotech is probably a one-of case in the information technology industry (IT) with a mix of a domestic and export presence.
Tata Infotech is a total solutions provider with a presence in software services, hardware manufacture, software distribution, networking services, education, and providing maintenance and support. The company's domestic market portfolio gets it high marks, as it has been doing medium to high end work — systems integration, providing complete solutions, developing products etc. Thus the company's domestic offerings are in line with analyst's expectations of a company in the growth phase and going up the value chain.
In exports, Y2K related work has been fetching about 40 per cent of the turnover. (Y2K related revenues are therefore a manageable 25 per cent of total turnover). This year however, Nirmal Jain, managing director, Tata Infotech, expects the ratio to drop to 30 per cent.
The company has been marketing its products overseas and has been marketing and supporting third party solutions from international majors like Microsoft, SCO and Uniplex. In English this means that the company builds solutions around products (of Microsoft etc) for its clients.
However, the level of sophistication of the export portfolio is lower than that of the domestic portfolio. This however, say analysts, is not a cause for undue alarm as developing skills in the domestic market and then using them internationally is a normal process of evolution.
But a cause of concern is that Unisys sub-contracts about 70 per cent of the total export turnover of Tata Infotech. Even the Y2K work is sub-contracted by Unisys to Tata Infotech. And this aspect remains a weakness for the company.
However, Jain says that the company is in the process of strengthening its own marketing network. Analysts are of the opinion that possibly, once the company is able to establish a better marketing network of its own, it would be able to translate its domestic knowledge into higher yielding export sales.
Jain points out an interesting advantage of the company's broad product mix. He says that it keeps the company's employee turnover lower than industry. This is because Tata Infotech is able to give a wide range of experience to its employees, which serves as a big incentive in holding them back. Jain feels, that the 'knowledge worker' of today is driven to a large extent by professional challenges rather than monetary benefits alone.
Lower profit margins (OPM): Tata Infotech's OPM was about 17 per cent in 1997-98, which is roughly half that of industry. This is because of the company's domestic presence. Rates that a company can charge in the domestic market are lower than what it can charge in the international market.
An analyst points out another reason for the low margins. He says, that exports contribute roughly two-thirds of the total turnover and roughly seventy per cent of total exports are sub-contracted by Unisys. Thus roughly Unisys sub-contracts roughly 46 per cent of the total turnover. On this, Unisys would be keeping a certain portion of profits with itself. This would lower realisations for Tata Infotech.
However, the lower margins due to reasons outlined above also offer an upside potential as the company is trying to develop its own marketing network overseas. Analysts point out that group company Tata Consultancy already has a wide distribution network and Tata Infotech could utilise that network some time in the future.
Additionally, the company has discontinued mere distribution of software. Instead it is hawking software by building solutions around it. This will give it better margins. The company is anyway continuing to concentrate on developing domain expertise, which should see it getting high-end jobs in the future.
Focus areas: Which areas will Tata Infotech focus on? Jain says that the company will continue to focus on systems integration and education (through Tulec) in the domestic market. Contrary to general perception, education continues to be a priority area for the company.
However, Jain says that the focus would become more evident from now on. Jain expects the education business to grow at 20-30 per cent in the future. Additionally, the company will continue to concentrate on developing domain knowledge in finance and banking, transport, airlines, telecom, commercial, manufacturing and defense. In the export market the company will try to develop itself as a software development outfit.
Lower third quarter turnover: Tata Infotech's third quarter turnover this year dropped to Rs 89 crore (Rs 10 crore = Rs 100 million) as against Rs 103 crore clocked in the second quarter. This drop, says Jain, was because of a slowdown in Y2K work that Unisys was procuring for the company. The slowdown was also because the company has discontinued mere distribution of software. As already mentioned, the company now sells the software it was earlier merely distributing, as part of a solution.
Overall Jain expects the company to be able to continue to grow at 30-40 per cent over the next two years. However, 1998-99 would see some slowdown in growth for reasons mentioned above. Overall, analysts expect Tata Infotech to definitely outperform the index. Hence, it certainly rates as a buy.
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