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.

Fact Sheet

Aftek Infosys
“Aftek House”
265, Veer Savakar Marg,
Shivaji Park, Dadar (West)
Mumbai 400028
Tel: 022 4454016
Fax: 022 4603628
www.aftek.com 
Listing (Stock Exchanges): Bombay Stock Exchange, National Stock Exchange
BSE Code: 530707
NSE Code: AFTEKINFO

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.

Financials

(All figures in Rs crore)

 

1999

2000

2001*

2002*

Revenues

10.3

19.8

44.5

91.1

Other Income @

1.1

3.5

4.0

Operating Profit

4.5

8.6

19.2

41.1

OPM (%)

43.6

43.5

43.0

45.2

Net Profit

3.4

8.5

21.1

34.7

Equity

5.7

6.0

6.0

6.0

EPS (Rs.)

5.9

14.1

35.2

57.8

* Projected

Year ended June 30

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.

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