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Strategies & Market Trends : India Coffee House -- Ignore unavailable to you. Want to Upgrade?

To: Mohan Marette who wrote (3785)	2/21/1999 10:39:00 PM
From: Mohan Marette	Read Replies (1) \| Respond to of 12475

SIERRA OPTIMA LTD (SOL) - A PLAYER TO WATCH OUT Company Web Site sierraopt.com Closing Stock price as of 02/19/99 Exchange:BSE Rs 372.75 NSE Rs 381.00 Key Financials (Rs Mln) Y/E March FY97 FY98 FY99F FY2000F FY2001F Op. Income 33 64 154 262 445 Op. profit 19 30 51 87 150 % growth 111.6 55.0 69.6 70.3 72.0 Op margin (%) 42.4 33.1 33.1 33.2 33.6 Inv. income 1 0 1 1 1 Depreciation 4 4 8 11 19 Interest 1 2 3 4 6 Pre-tax profit 15 24 41 73 127 Tax 0 1 3 10 22 Net profit 15 23 38 63 105 % growth 70.7 52.4 63.8 64.9 66.8 Net margin (%) 32.8 25.6 24.7 24.0 23.6 Equity capital 33 33 33 33 33 EPS (Rs) 4.7 7.1 11.6 19.1 31.9 BV (Rs) 13.8 19.0 26.9 39.5 61.3 P/E (x) 46.9 30.8 18.8 11.4 6.8 P/BV (x) 15.8 11.5 8.1 5.5 3.6 ROE (%) 33.7 37.3 43.1 48.5 52.1 As emerging Indian IT firms enhance its programming skills at an increasing pace, the big league companies will be forced to seek specific areas of development so as to remain ahead and be competitive. Since the IT business is relatively a high margin one, some Indian companies might be tempted to set up a software company without assessing the attendant business risk. SOL is extremely focused, and consciously built an expertise in developing migration related software and created a niche for itself. Since SOL is an authorised Oracle solutions provider, the focus is on customising Oracle financials. It is developing migration tools for Oracle, which are being sold alongwith different modules. Although writing migration software is its core business, it is developing tools on Windows based platforms as well. Shift Towards Oracle To Benefit Sierra Oracle is a global leader in relational database segment with a 60% market share, SOL is a major beneficiary by virtue of its expertise in Oracle. In the last few years Oracle has developed quite a few strategic business applications, which have resulted in global corporations switching from Ingres and Sybase to Oracle. SOL has implemented Oracle applications in the areas of finance and distribution. SOL's focus revolves around 4 areas. 1 De Developing migration and porting tools 2 Providing migration and porting services 3 ERP - implementation and customisation and 4 Developing customised commercial application software Strategising To Be A Migration Specialist It is bit difficult to assess the exact market size for 'migration'. Our assessment is that an average migration cum integration project would cost around US$1mln, thus the total market is close to US$3bln. SOL is consolidating itself into a migration specialist through the launch of a few conversion tools. Since it has an understanding with Oracle, all the conversion tools developed by SOL will be used while localising or customising Oracle applications. We expect the revenue to grow by 70% CAGR over the next 3 years. SOL Is In The Niche Migration Business In the absence of appropriate migration tools, corporates bear the high cost of running on multiple hardware platforms or inefficient operating systems. SOL develops migration tools for front end (screen layout) and back end (storage of data in a certain format) across platforms. These migration tools help to obtain the same set of functionality on a different operating system. Attractive Product Mix SOL is unique in many ways since it depends very little on Y2K or euro. Although this could subdue its growth in the short term, we believe the migration business offers a solid base for SOL to have a robust revenue growth. Also, the company is unlikely to be impacted as the quantum of business from Y2K and euro will decline sharply beyond year 2002. Exports account close to 70% of its revenue, which we expect to be sustained in future as well. US, Canada and Europe account for 63% of revenue and Japan contributes around 7%. Revenue break-up given below shows how its core business and ERP complement to provide a balanced product mix. Revenue stream FY97(%) FY98(%) FY99F(%)FY00F(%)FY01F(%) System migration 61.8 58.1 59.4 60.2 59.8 ERP implementation 26.4 31.4 31.1 31.0 31.4 Software development 11.6 10.3 9.3 8.7 8.8 Y2K 0.1 0.1 0.2 0.4 0.2 Strong Growth in 1H Earnings For 1HFY99, SOL reported a net profit of Rs19mln - YoY growth of 92%. Strong growth in PAT was mainly driven by a 93% revenue surge to Rs67mln. Software exports accounted for 72% of total revenue and the balance 28% came from customising (Oracle) for the domestic market. The billable programmers in the 1HFY99 were up by 70% and the average man-month rates were up by around 8%. Operating profit doubled YoY to Rs 20 mln. Operating margin expanded from 29% to 30%. Trading At Attractive Valuations We project the EPS to grow by 65% CAGR over the next 3 years. Since our buy recommendation, the stock in the past 5 months has gone up by 63% outperforming the sensex by 60%. The stock is currently trading at a PER of 11xFY2000F and 7xFY2001F earnings. Despite the massive stock outperformance, the strong sustained earnings growth, high ROE, attractive valuations, and excellent management should help a substantial appreciation in the stock price. We continue with our BUY recommendation. R. Ravi (91-22-2880041) (Source:Birla Marlin, Report Dated Dec,21,1998) ============================