Helios & Matheson Making Acquisitions A Habit

The

number of small and medium enterprises operating in any sector is a good

indicator of its long-term growth opportunities. As we all know, despite the

huge potential of the Indian IT sector, the SME (small and medium enterprise)

segment is still quite underdeveloped. According to Nasscom estimates, the SME

segment contributes only 10-15% to the total turnover of the sector. The reason

for this is largely the dramatic changes that took place in outsourcing markets

post 9/11 wherein clients drastically reduced the number of vendors leading to

the death knell to many a software startup. The situation is now changing slowly

but steadily. And, we believe that this time around, unlike the dotcom boom

times, this trend will last longer. Nasscom estimates that by 2008, 50-60% of

the IT industry revenues in 2008 will come from the SME segment. However, given

the nature of competition in the sector, the road to success will require apart

from hard work, a focus on niche markets based on domain knowledge rather than a

pure cost competitiveness driven business model.

During the last two

years as the global economy has recovered and global IT buyers have become more

open to outsourcing in general and from smaller vendors in particular, smart SME

sector Indian companies have exploited this opportunity and some are now well on

the road to success. Among such emerging companies is Chennai based Helios &

Matheson.

Founded in 1991, Helios

& Matheson Information Technology is a focused IT company providing software

and consultancy services in the area of healthcare, electronics and

communications. Other key verticals addressed by the company include banking,

financial services and insurance (BFSI), and manufacturing.

Helios made its initial

public offer in 1993 and company's current equity stands at Rs 20 crore with

promoters holding 46.2%, institutional investors holding 7.1%, Indian public

holding 34.1% and others holding the balance 12.5% of the stake. In the past

five years, Helios & Matheson total income has grown at a CAGR of 55.6% to

Rs 122.1 crore and its net profit too has risen at a CAGR of 46% to Rs 18.6

crore. The chairman of the company is V Ramachandiran and Muralikrishna GK is

the managing director.

The company reported an

impressive set of accounting figures for the financial year ended March 2005,

wherein revenues amounted to Rs 122.3 crore as compared to Rs 75.5 crore in the

previous year, up 61.9%. Net profit for the same period was Rs 18.6 crore,

growing 133.5% as compared to Rs 8 crore in the last fiscal year.

The company has 70

clients, which are spread across the US, Europe, and South East Asia including

Ameriquest, CISCO, Epson America, IBM Global, JD Power & Associates, KPMG

Consulting, Warner Brothers, Ednox, UBS Warburg, Asea Brown Boveri, and Citicorp

among others.  Company has seven

development centers out of which six are located in India and one in the US.

Helios & Matheson

has chosen the path of strategic acquisitions for growth both in terms of

revenues and penetration into new geographies and verticals. In 2001, it

acquired and successfully integrated California based The Laxmi Group. The group

mainly provided services in the areas consulting services and project management

to several Fortune 500 companies in USA. It also acquired another company in

2001 called System Logic Solutions based in Bangalore that focuses on client and

server solutions, enterprise applications, groupware solutions, data

warehousing, professional services, and high-end training. System Logic

Solutions is a Lotus Business Partner and is also a Microsoft certified

solutions provider. It also acquired Maruthi Infotech in year 2004, which

focuses on healthcare and insurance domains.

For the third quarter

ended December 2005, the company registered a healthy growth in terms of

revenues, which were up 7.1% sequentially amounting to Rs 56.5 crore as compared

to Rs 52.8 crore and up 73% as compared to Rs 32.7 crore in the same quarter of

the previous fiscal year. Net profit was Rs 10.1 crore, up 11.9% as compared to

Rs 9 crore in the immediate previous quarter and year-on-year the net profit

grew 89.4% as compared to Rs 5.3 to 23 crore. The current total staff strength

of the company stood at 1200.

In 2005 Helios &

Matheson Information acquired vMoksha an IT outsourcing company, for a total

consideration $ 19 mn. It is also a SEI-CMMi Level 5 and BS 7799 certified

company.  The acquisition also

includes three vMoksha entities in the US, Singapore, and India. This

acquisition helped Helios & Matheson's to shore up its presence in the

European markets. With these acquisitions the company's offshore to onsite

ratio has gone up



from 35:6 to 45:5.

Going forward company

has announced its decision to invest Rs 75 crore in additional facilities in

line with the company's growth plans. The company plans to invest

approximately Rs 25 crore this year in phase one of the project, which can house

400 people. Helios & Matheson plans to invest another Rs 50 crore in the

next two years in phase two expansions in tier II cities like Coimbatore. Next

the company is planning to add 500 People in order to takes its total staff

strength from current 1200 people to 1700 people.

Helios & Matheson

is seeing strong traction in the IT spend of its top 10 clients, especially

those in the healthcare space. Going ahead it expects to earn revenues in the

range of Rs 61 crore to Rs 62 crore for the fourth quarter of fiscal 2006 and

net profit in the range of Rs 9.5 crore to 10.4 crore. For the financial year

2006, Helios & Matheson expects revenues in the range of Rs 220 crore to Rs

220 crore and net income for the full financial year 2006 expected to be Rs 36.4

crore to Rs 37.2 crore. Company expect net margin for the full year to be 17%,

up by 2% y-o-y basis.

Helios & Matheson

currently trades at Rs 220 discounting our estimated March 2006 and March 2007

EPS by 12 and nine times respectively which is reasonable considering its strong

growth rates and standing in the sector. We believe that the company is a market

out performer.

Sushanto Mitra



The author is the founder of Technology Capital Partners  


sushanto@techcapIndia.com




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.