AFTEK INFOSYS: Calculated Shift to Products

It is no secret that a number of technology companies

commenced operations with product development dreaming to be a leading player in

the area. However, soon realizing that financial feasibility is crucial for the

existence of the business, a majority of them shifted focus to services. One of

the most critical aspects of success of a product is marketing, which needs

enormous financial resource. Technology-driven companies ignore this important

factor and end up changing the business focus.

Operating in core-embedded technology, Mumbai-based Aftek

Infosys is foraying into products. Aware of its marketing weakness, the company

has created expertise in the embedded technology providing services to product

companies. The company is now gearing up to launch its products in association

with Computer Associates and Ather Software. Aftek is currently traded at Rs 863

with a 52-week high of Rs 5,000 and a low of Rs 850.

Genesis in hardware

Aftek Infosys was set up in 1986 by five IT professionals,

who were led by Ranjit Dhuru. The promoters were all employees of PCS. The

company commenced operations developing products, own branded PCs, IBM PCs and

embedded software. The company’s turnover has grown from Rs 2.9 crore in 1992—93

to Rs 19.8 crore in 1999—2000.

The company made 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. The issue, made at a time when the markets

began their downward journey, was over subscribed 66 times indicating the level

of retail interest.

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. With more than a decade’s experience in hardware and

embedded software, Aftek decided to exit the hardware business and concentrate

on software services as a key area of operations. Subsequently, Aftek

discontinued with the hardware business, which was followed by the

re-christening of its name. Aftek Business Machine thus became Aftek Infosys

with focus on embedded software service and embedded products. To expand its

operations, Aftek placed its shares with private investors at a price of Rs

1,950 per share during the current year. Aftek had a dream run on the stock

exchange where its share price spurted from Rs 35 about 18 months back to touch

Rs 5,000 in March 2000, only to slide to the Rs 1,000 level after its shares

went into compulsory rolling settlement. Out of the total equity of Rs 6.00

crore, Promoters and friends hold 28%, Mutual Funds holds 28%, FIIs hold 15%,

corporate investors hold 10% and the balance is held by the public.

Eye on embedded technology

Under the software services, the company’s services include

embedded software, systems and Web middleware solutions. Aftek achieved 85% of

the total revenues from software services in the year ended March 2000. Aftek

provides services to product companies in the international market. The company

believes in providing cutting edge technology solutions and is currently engaged

in providing such services to its clients in the US and Japan. Some of the

company’s major clients include @pos.com, Switchon Network, A2 Consultants and

I2Office. Aftek is currently providing services to 30 clients based in the US,

Europe and Japan.

Under the embedded products, the company sells PDAs and

smartcards to banks, SMEs and transport companies. Some of the products designed

and developed by the company include Smart Access, contact-less smart card for

small offices, SmartBank and SmartInspect for banks’ transactions, TickIt for

transport services and Smart Bus Reader for buses. The company’s contact-less

smart cards have been launched for Mumbai’s city transport bus service–BEST.

Aftek currently has five leased development centers in Pune,

a corporate office in Mumbai and a production facility in Solapur, Maharashtra.

The company had an employee strength of 175 at the end of June 2000, which is

being scaled up in line with the increase in business. All the technical

employees are based offshore and the company claims to get revenues of $25—$30

per hour for its services.

Future: Into products

With firm focus on core technology, Aftek plans to make a

major dent in the global market by launching its own embedded products. The

company has over the years created expertise in hardware and embedded software,

both for its own products and for other companies. The company has proven its

capabilities in the embedded software services, which are growing at cent

percent each year. While Aftek expects the current services to grow at historic

rates in the coming years, the commercial launch of its own products are eagerly

awaited. Among these products, Aftek has developed Powersafe, a UPS monitoring

software product, which is integrated with Computer Associates’ Unicenter-TNG.

CA assigns certificates to the products that can be integrated with its own and

these certifications are based on the value addition to CA’s products. Aftek

has received the highest certification from CA for Powersafe. CA is the leader

in enterprise network management systems with Unicenter-TNG commanding 60% of

the market share with the rest shared by Novell, IBM and HP. Unicenter-TNG is

installed at 20,000 clients across the globe and at 60 clients in India. While

Powersafe has been developed since the past few months and received

certification in April, the company is yet to commercially launch the same.

Powersafe is currently installed at four reference sites in the US and India.

The company plans to launch it jointly with CA in January. The delay in

launching the product was due to the fact that Aftek was setting up a support

center for efficient delivery. The 20-member technical support team is being put

in place and Aftek expects revenues of $7 million in the first six months of the

launch of Powersafe. The product has been developed at a cost of Rs 4 crore and

the same has been written off in the accounts.

Showing its capabilities in wireless technology, the company

has tied up with Ather Software, which provides wireless information services to

customers of Charles Schwab, who use palm tops. Ather will charge $50 per month

per user from Charles Schwab and Aftek will get a royalty on Ather’s sales and

will retain the IPR of the product.

The third product developed by Aftek is SmartHire, which has

been transferred to its wholly owned subsidiary–Aftek Infosys USA. The

innovative product aims at shortening and reducing recruitment and selection

process. SmartHire is aimed at the US recruitment market and therefore the

company decided to transfer the ownership to the 100% US-based subsidiary, to

ensure proper marketing of the product. The product has been developed at a cost

of about Rs 1.5 crore and has been transferred at a transfer price of Rs 4.3

crore in 1999. Aftek will lease the product to the recruitment agencies and will

get revenues in the form of customization and maintenance apart from $1 per

application scanned. The company expects dividend income of Rs 1 crore from the

subsidiary in the current fiscal.

Going ahead, Aftek’s products are expected to play a

crucial role in pushing its growth. The company seems optimistic about product

revenues from its products, encouraged by the gold certification assigned by CA

to Powersafe. Moreover, considering the polarized market for enterprise network

management systems (ENMS) market comprising HP, Novell, IBM apart from CA, Aftek

plans to explore partnerships with them that would enable the company to cover

the market and generate greater revenues from the product. The promise of the

other products should further add to Aftek product revenues. In terms of its

offshore delivery capacity, Aftek is setting up a 42,000 Sq ft development

center in Pune, which is being financed by the funds recently raised on private

placement of shares to Mutual Funds and FIIs as well as internal accruals.

Financials: On the rise

After exiting out of the hardware business, Aftek’s revenue

and margins have improved substantially. In June 2000, Aftek’s reported

revenues of Rs 19.8 crore compared to Rs 10.3 crore in the corresponding period

in the previous year. Net profit grew at a much higher pace of 151% to touch Rs

8.5 crore. Aftek has followed the performance with an equally impressive show in

the first quarter of the current year. While revenues jumped 84% to Rs 7.4 crore

in the quarter ended September 2000, net profits have leaped from Rs 1.5 crore

to Rs 3.5 crore.

Aftek expects to see a substantial jump in revenues with

product sales contributing for the first time starting third quarter. While the

company would continue to perform well in the services segment, it would earn

marginal revenues from the product in the current year, considering the fact

that the company is yet to commence marketing efforts. Operating margins in the

coming years will improve as the company increases the revenue from product

sales.

Investment potential: Value in product

Aftek is currently traded at Rs 724 discounting its projected June 2001 EPS

by 21 times and June 2002 EPS by 13 times. We believe that the company’s focus

on core embedded technology and its expertise in product development will help

it create a niche in the otherwise crowded software export market. We are

concerned about the lack of liquidity that has been hounding the scrip ever

since it was moved into compulsory rolling settlement. The company’s share

price took a downward turn ever since it was included in rolling settlement.

Based on the estimated performance of its existing business, we feel that the

stock price is fairly valued. However, Aftek’s valuations would see a major

upside once it starts getting revenues from the products. Accumulate.

Sushanto Mitra



is the founder of Technology Capital Partners


The views reflected here are of the author and not of this publication. No
liability is accepted for losses based on the information presented here.