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.



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