Aftek: European Exposure: Q2 sales up 22%

The investment attractiveness of the software services sector has been on the
wane in recent months not only as a result of the appreciating rupee but also
due to the surge in growth prospects of other sectors. Investors in IT counters
have been worried a lot and the recent announcement of moderately good results
from Infosys should be a mild stress buster.

The stocks have taken a beating, but at the same time they have become
actually more attractive as an investment option. We believe that the core
competencies of the Indian IT and IT-enabled services remain strong and that
despite the dollar woes, top Indian software companies will continue to deliver
over 20% earnings growth in the coming years and, therefore, deserve a second
look in personal portfolios. Companies with a higher exposure to European
markets also deserve a mention as their earnings are less impacted by the dollar
volatility. Among them is Mumbai-based Aftek, which earns over half of its
revenues from Europe.

Aftek was set up in 1986 by five former employees of PCS. The company
commenced operations by developing products, own branded PCs, IBM PCs, and
embedded software. Aftek came out with a public issue in April 1995 to finance
its Rs 5.3 crore expansion plans, which included setting up manufacturing
facilities as well as refurbishing its facilities for software development in
Mumbai and Pune. The project was financed through equity with participation from
IDBI venture capital equity funding. With the changing scenario in the IT sector
and the dwindling margins in the hardware segment, Aftek decided to focus on
software as its core area of operations and exited the hardware business. Aftek
is now a seasoned player in Software Product Engineering space and has also
developed IP in areas such as wireless telecom, automotive, multimedia, and
transport. It also has significant exposure to global embedded market estimated
to be $88 bn in the current year.

The founding team consists of experienced technical team led by chairman and
MD Ranjit Dhuru who happens to have legal qualifications. He has been
instrumental in successfully transforming the company with hardware background
into a thriving, software products and services company. As per the shareholding
pattern as on September 30, 2007, promoters held 17.3%, FIIs and banks owned
25.6%, while corporates and individuals held 20.1% and 37% respectively.

For FY 07 ended March 31, 2007, net revenues stood at Rs 333.4 crore
compared to Rs 258.7 crore for the previous year, a growth of 28.9%. Similarly,
net profits stood at Rs 90.03 crore, up from Rs 94.9 crore achieved in the
previous year. Geographically, Europe contributed 57.4%, the US 36.7%, Japan
0.7%, and India 5.2% of the total revenue. Similarly, products contributed 5.6%,
embedded 0.7%, and services 93.7% of the total revenue.

During the year, Aftek launched VoIP-GSM Gateway, a product developed by the
company, for a European customer and also got CE certification. VoIP-GSM Gateway
is a device that allows IP telephony operators to deliver their services
directly to the existing GSM cell phones. It acts as a VoIP to GSM and GSM to
VoIP gateway device. It allows an ordinary GSM mobile phone to make and receive
VoIP calls to and from Skype IDs. Also, Afteks wholly owned subsidiary, Arexera
Information Technologies, entered into a strategic tie-up with BDT AG of
Germany. Under the terms of the tie-up, Arexera will license its
state-of-the-art search technology for BDTs new data storage device, "Gingcom
Appliance". The subsidiary also entered into strategic tie-up with
Electroniksystem-und Logistik, a Germany-based software major to offer solutions
to automotive sector in the area of telematics and embedded technologies.

For the second quarter of FY 08, Aftek registered net sales of Rs 95.73
crore, compared to 78.71 crore previous year same quarter, an increase of 21.62%
on a y-o-y basis. During the same quarter, its net profit was at Rs 26.19 crore,
compared to Rs 22.53 crore previous year same quarter, an increase of 16.24%.
During the quarter, Seekport AG got listed on Frankfurt Stock Exchange on
September 12, 2007 at a base price of 4.75 Euro per share. The total valuation
of the company works out to Euro 475 mn. Aftek also got approval for
Amalgamation of C2Silicon Software Solutions and Elven Micro Circuits with the
company and their respective shareholders with requisite majority.

For FY 08, the company expects to clock in revenues between Rs 380-400 crore,
net profit between Rs 94-105 crore, and an EPS between Rs 11-12.

Aftek shares currently change hands at Rs 80, discounting its 2009 earnings
by five times.

Market Outperformer.