Aftek Infosys Limited: On The Fast Track

The upturn in the software in dustry is evident when one looks at the
excellent performance reported by IT majors in the first two quarters of fiscal
2003. With the US economy showing signs of revival, the Indian IT industry is
likely to benefit from increased spend in technology by US corporates. This
apart, the growing ‘intelligence’ embedded into domestic appliances,
automobiles and machinery is driving an increased demand for system-level
software development for quite a few software companies in India. One such
company, which has sustained its performance even in bad times and now will
benefit from the upturn is Mumbai-based Aftek Infosys.

Aftek Infosys was set up in 1986 by five ex-employees of PCS. The company
commenced operations by developing products, own branded PCs, IBM PCs and
embedded software. Aftek 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. In 2003, Aftek closed its global depository receipt
(GDR) issue to fund its expansion and growth plans. The company issued 1,333,100
GDRs, each representing three equity shares of Rs 10 each, amounting to $15
million at a price of $11.25 per GDR.

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 and products as a key area of operations. Subsequently, Aftek
discontinued with the hardware business, which was followed by the
re-christening its name to Aftek Infosys from Aftek Business Machine and focus
on embedded software service and embedded products. Today with a headcount of
350 employees and associates and a 100% offshore model the company stands apart
from majority of India software companies. Aftek’s current equity stands at Rs
10 crore with promoters holding 14%, institutional investors holding 5%, the
Indian public 19%, 38% are GDR holders and the balance 24% of the equity is held
by others.

Aftek focuses on providing software services and product development in the
area of embedded software, one of the fastest-growing segments in IT. The
company closed the year in June 2003 with revenues of Rs 92.0 crore as against
Rs 61.5 crore in the previous year, a jump of 50%. Net profits were Rs 42.2
crore, up 25% over the previous fiscal.

Software services are Aftek’s mainstay, covering areas of embedded, mobile,
graphics and wireless applications. Over the past few quarters, software
business has been growing rapidly as the slowdown in the US has impacted its
product business. Software revenues formed 67% of the total revenues in the year
ended June 2003 as compared to 50% last year. Revenues from software grew 100%
to Rs 61.6 crore in 2003.

In the products segment, the software products developed by Aftek include:
the infrastructure management product, PowerSafe, and an enterprise-wide UPS
management solution. Powersafe is integrated with Unicenter, the enterprise
network and system management solution, from Computer Associates (recently
integrated with HP Openview) and is also gold-certified CA smart solution. For
mobile and wireless devices, Aftek has developed Powersafe wireless/mobile UPS
manager. This product allows system administrators to monitor and control UPS
parameters in a wireless/mobile environment using PDAs or phones. Aftek’s
third product, Scout SMS Bridge, is an enterprise-wide mobile asset management
solution, which allows system administrators to monitor and control both
networked and mobile assets on a single SMS console. The software product
business contributed to 27% of the total revenues compared to 43% last year,
de-growing by 4% during the year to Rs 25.5 crore.

In the embedded software space, Aftek products include PDAs, security
gateways, bus validators, which are contact-less, smart-card enabled and
wireless capable. These products find applications in transport, banking and
automation industries. Aftek’s revenues from embedded products were up 18% to
Rs 4.93 crore in the year 2003.

Aftek’s performance for the first quarter ended September 2003 was
impressive with revenues growing 20% quarter-on-quarter (q-o-q) and 55%
year-on-year (y-o-y) to Rs 31.1 crore. Operating margins declined marginally to
45% whereas the net profit was up 17% q-o-q and 31% y-o-y to Rs 13.1 crore.
Revenues from software services have increased and contribute 75% of the total
revenues, followed by software products contributing 21% and embedded products
contributing 4%, respectively. Geographically, US contributed to 50% of total
revenues, down from 61% last year. Revenue share from Europe increased from 28%
to 42% whereas Japan and India share declined from 11% to 8%.

The jump in revenues from Europe reflects the company’s strategy over the
past year to diversify its geographical base and also penetrate larger
corporations through the partnership model. Going ahead, Aftek plans joint
ventures with companies with IPRs, strong client base and domain knowledge in
the 3G mobile communication and unstructured data management (UDM) space. To
enter the UDM space and expand its base in the European market, Aftek acquired
49% stake in the Munich-based Arexera Information Technologies GmbH in March
2003 for a cash deal of 8.86 million Euro. The company retains the right to
acquire the entire 100% equity in Arexera, based on certain predetermined
milestones over the next 3—4 years. Arexera is engaged in the development of
technologies and solutions in the fields of knowledge management, data
compression and content management. It has a strong product portfolio in the
knowledge management space and its clients include Siemens, BMW, Axel Springer
Publishing and KPMG Beiten Burkhardt GmbH.

Aftek’s recent initiative in this wireless area includes the launch of
Jadoogar, a framework that supports Wi-Fi networks, Bluetooth and 3G and manages
and controls multi-location devices. The company also entered into an MoU with
the UK-based 3G Tel to form a joint venture Aftek 3G Tel there, which will be
engaged in the area of wireless and mobile, with focus on 3G and other emerging
technologies. Aftek will invest up to £2.5 million in creating infrastructure
to convert IPRs into products held within Aftek 3G Tel and those acquired by 3G
Tel in the recent past.

Despite software services forming a major chunk of its total revenues, Aftek’s
operating margins are better than most of its peers due to the strategy to
utilize the company’s domain knowledge and reusable components to provide
software services. While the company continues to remain on a strong path as far
as software services go, the products business is yet to reach a critical mass.
Product revenues have been on a decline for the past few quarters and its
flagship product PowerSafe, despite receiving gold certification from CA for
integration of Powersafe with its enterprise network product Unicenter, has not
shown the growth it deserves. Aftek has now decided to integrate Powersafe with
more e-business management software solutions, which include Hewlett Packard’s
Openview, IBMs Tivoli and BMC Software’s BMC. Moreover, the company plans more
alliances with global companies having strong IPRs with the aim to expand its
geographical base and offer its products and services. Opdex Inc, the American
arm of Aftek Infosys has tied up with the US-based MGE UPS Systems to market
Aftek’s Powersafe solution.

Aftek currently trades at Rs 302, discounting the projected June 2004 EPS by
five times and June 2005 EPS by just four times. The valuations look extremely
cheap especially in the light of the Rs 90 crore cash lying with the company,
which translates to a cash of Rs 90 per share. Aftek’s current share price
does not capture the recent re-rating of the software sector. Buy.

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