AZTEC SOFTWARE: Shifting Focus to Survive

Today’s technology is obsolete tomorrow; so are market

sentiments. It was only less than a year back when investors flocked to the

market to mop up infotech stocks. And if stocks in the secondary market seemed

expensive, there was always the primary market to try one’s luck. Suddenly,

investors are turning their back on the IT stocks. While there has been no major

change in the sector’s performance, the Nasdaq meltdown and growing fears over

the sustainability of revenues of IT companies have affected sentiments.

Moreover, a majority of companies that offered shares through IPOs are trading

below their offer price.

Bangalore-based Aztec Software and Technology Services is one

such company which is offering shares at a seemingly high premium. While the

company may not have listed at a huge premium, its strong technology focus and

excellent management may yield good returns in the long run.

Background: Technology driven

Aztec Software and Technology Services was formed as a

private limited company in 1996 and was converted into a public limited company

in June 2000. Set up by S Parthasarathy initially to provide solutions in

database, datawarehouse internals and middleware, the company has changed its

business model to provide technology solutions to Internet companies.

Parthasarathy, the chairman of Aztec, is a mechanical engineer from IIT Madras

and a PGDM from IIM, Ahmedabad. Parthasarathy heads an Aztec subsidiary based in

California. Co-founder V Swaminathan is an engineer from IIT Madras and an MS

from University of Missouri, USA.

In 1996, Aztec developed jp@ct (Java Powered Access

Technology), a high performance, scalable and multithreaded server with reusable

components. It also developed expertise in XML and developed a FIXML solution

for Silicon Summit Technologies. Aztec extended its expertise in jp@ct by

developing Jpact List Server, an Internet-based end-to-end e-commerce platform.

The company transferred the IPR of the product to its 100% US-based subsidiary

Aztec Software Inc, to target the US market, in 1999. Aztec also worked with

Microsoft on SQL 7 for two years and thereafter for a number of Microsoft

products.

Aztec was funded by e4e Holdings, a Mauritius-based

subsidiary of e4e Inc, in November 1997. e4e Holdings, which has invested Rs 2.3

crore in Aztec, was formed by KB Chandrasekhar, the co-founder of Exodus

Communications. Chandrasekhar is currently a director of Aztec.

Operations: Moving into solutions

Aztec is currently engaged in providing e-engineering

solutions and works as a product development partner to major US companies. In

e-engineering, the company provides solutions to ASPs, B2B and Internet

start-ups based on its expertise in core database technologies, datawarehousing,

infrastructure, XML and Java Technologies. In the past 18 months, the company

has shifted its focus from product development to e-engineering solutions and

technology services to ASPs and Internet companies. The company is involved in

developing, architect, designing and e-integrating the solutions for ASPs and

Internet companies. Some of the company’s clients include Jamcracker Inc,

Asera Inc, Capstan System Inc, Ingenuity System Inc, Netopia Inc and Reez.com.

Aztec is working with a number of companies in the US,

including Pervasive Systems, Ardent Software and Enterworks, for product

development. The product development service helps the company create expertise

in latest technologies, which can then be used to provide services to the

e-engineering clients.

The company earns 95% of its revenues from e-engineering; the

rest comes from product development. Aztec currently has an employee strength of

263 and has one of the lowest attrition rates in the industry, which was less

than 6% in March 2000. Aztec Software, the company’s subsidiary in the US, is

yet to make profits. The subsidiary earned Rs 1.3 crore, a net loss of Rs 85

lakh, for fiscal ended March 2000.

Project: Offshore expansion

Aztec is offering shares of par value Rs 3 at a premium of Rs

77 per share through book building and subsequently through an IPO. It is

offering 5,850,000 shares through the book building route and 650,000 shares

through the public issue. The company plans to raise Rs 52 crore, which would be

utilized to expand its current capacity, create additional offshore capacity and

acquire companies in similar line of business. The company currently has a

15,000 Sq ft facility at Bangalore and plans to expand this to 30,000 Sq ft.

This would cost Rs 14.4 crore. Another building of approximately 50,000 Sq ft.

is proposed to be taken on lease and refurbished at an estimated cost of Rs 25.7

crore. The cost includes furnishing, interiors, computer and other hardware.

While the expansion of the existing facility is expected to be completed by

January 2001, the new facility would be up by August 2001. Apart from the

capacity set-up, the company plans to earmark Rs 8.4 crore for acquisition,

joint ventures or alliances for ensuring rapid growth.

Post issue, the promoters would hold a 56% stake followed by

an employee trust at 26% with institutions and the public holding the balance

18%. Among the promoters, e4e Holding would hold 39%, Aztec chairman

Parthasarathy would hold 12% and co-promoter Swaminathan would hold 5%.

Future: Technology edge

Aztec plans to focus on providing solutions in its area of

expertise, which include database internals, Internet middleware, Java and XML.

The company plans to cater to clients among ASPs, B2B and other Internet

companies. Aztec has developed AzASAP framework for ASPs. We however believe

that the company would have to spread its wings by offering services in other

segments, due to the highly risky and uncertain Internet and B2B space.

Aztec’s current employee strength would go up as additional

facilities are put in place. One of the major concerns of the

company is the concentration of revenues on a few clients. The company earned

77% of revenues in the first quarter ended June 2000 from just five clients.

However, the company is moving in the direction of acquiring more clients to

reduce its dependence on a few customers. Aztec added six clients in the first

quarter of the current year.

Financial performance: Improving

The financial performance of the company has been

unimpressive in the initial years of operations. However, with the shift in

focus from product development to solutions, the company has performed better in

the past 18 months. With the focus shifting towards providing solutions, the

company improved its performance in March 2000. Aztec reported revenues of Rs

13.7 crore and a net profit of Rs 4.1 crore in March 2000. In the first half

ended September 2000, Aztec achieved turnover of Rs 32 crore and a net profit of

Rs 8.6 crore.

Investment potential: Good long-term bet

Aztech is offering Rs 3 par value shares for Rs 80, which discounts its

annualized March 2001 EPS by 18 times. The issue seems to be over-priced when

one looks at the massive beating taken by the infotech stocks lately. Moreover,

Aztec has only recently stabilized its operations, which is indicated by its

performance in the past 18 months. While a price-earning ratio may seem on the

higher side, we believe that the company has inherent strengths to justify the

premium. Aztec’s major strength is the quality of the management, which has

vast experience in the technology sector. Moreover, the association of KB

Chandrasekhar, who also happens to be the major shareholder through e4e Inc,

would help Aztec in expanding operations in the international market. We believe

that the company’s focus on high-end technology and expertise in emerging

areas would help it create a sustainable business model, which would be

reflected in its financial performance in the coming years. While we believe

that the negative sentiments prevailing in the market would limit the premium on

listing, the company should provide good returns in the medium to long term.

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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.