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MINDTECH INDIA: Aiming for the Big League

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DQI Bureau
New Update

Software stocks slumped during the last few months amidst growing uncertainty

on technology spend by the US corporates. With threats of a recession in the US

economy, doubts are being raised on the sustainability of spending on technology

by the US firms. However, one needs to understand that with the recession the

need to reduce costs will increase. Strategic outsourcing, especially in the

area of IT solutions is therefore likely to increase. Thus, while total IT

spends may decrease, IT outsourcing is bound to increase its share in IT budgets

and thereby help Indian companies providing such services. Among Indian

companies, we expect large IT companies to have an edge over their smaller

counterparts due to economies of scales as well as access to clients. It would

be the second and third rung companies, which would face the challenges of

creating domestic infrastructure as well as making new client acquisitions in a

recession-hit market.

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Fact Sheet

Mindteck India



Address 63-B, SDF-II,


SEEPZ, Andheri (East)


Mumbai 400096


Tel.: 022 8290250 / 8290498


Fax: 022 8290820 


Web site www.mindteck.com 


Listing (Stock Exchanges): Bombay Stock Exchange, Ahemadabad Stock Exchange, Bangalore Stock Exchange 


BSE Code: 17344






The need for such companies to quickly increase the size and market

penetration is now therefore stronger than ever before. Mumbai-based Mindteck is

one such company that is moving into the big league through acquisitions. The

company has restructured its operations in the past two years through equity

reduction and change in the management and is now aiming at becoming a major

software services company in the country within the next two years. It is

currently traded at Rs 90 with a 52-week high of Rs 564 and low of Rs 57.

Background: Hardware-driven

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Mindteck India was formed as Hinditron Informatics in 1991 by Hemant Sonawala

& Associates. Sonawala is also the co-founder of Digital India. The company

was formed to provide services in the area of distribution of medical equipment,

graphics software and related products. Hinditron came out with the public issue

in 1993—94 at par to finance its capital plans. The company was performing

reasonably well until 1995, when its revenues declined due to depressed industry

conditions. With uninspiring financial performance, the company decided to focus

on its core competency business of software engineering services and networking.

During the same period, the company made preferential allotments twice, which

enabled the promoters to increase their stake to 75%.

Further restructuring was aimed at wiping out the accumulated losses. Embtech

Holdings, a subsidiary of Bahrain-based TAIB Bank, acquired 74 lakh shares held

by Hemant Sonawala & Associates at Rs 8 per share, thereby taking

controlling stake in the company. Embtech Holdings, Pradip Shah and Darius

Pandole then made an open offer to acquire 24 lakh shares at Rs 8 per share as

per SEBI guidelines. The company further allotted 80 lakh shares to Embtech

Holdings, Darius Pandole, Pradip Shah and Saurabh Digital Devices & Circuits

in 1998-99 at a price of Rs 8 per share. The company had accumulated losses of

Rs 13.28 crore in the balance sheet, which were wiped out by reducing the equity

to 25% of the actual. This was done by reducing the par value of the shares from

Rs 10 to Rs 2.50, and consequent to the approval from the Bombay High Court the

equity capital was reduced from Rs 20 crore to Rs 5 crore in 1999-2000. The par

value was subsequently converted to Rs 10 from Rs 2.50. With the change in

promoters, Hinditron was renamed Mindteck India in September 1999.

Mindteck India has undergone a major transformation in the past year, since

its acquisition by TAIB Bank in January 1999. TAIB Bank is a leading investment

bank with a significant presence in the Middle-East, the US, the UK, India and

East-European countries. The current operations of Mindteck are managed by CEO

Vijay Kumar, an electronic engineer and an MBA from the US with more than 20

years of experience in the IT industry. Kumar has earlier worked with Wipro and

Tektronix India.

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The current equity capital of Mindteck stands at Rs 5 crore, out of which the

promoters hold 77%, NRIs and OBCs hold 1%, corporates and mutual funds hold 2%

and the public holds the balance 20%. Among the promoters, Embtech Holdings has

72%, directors 3% and Pradip Shah 2%.

Operations: Restructured

Mindteck India currently provides services in embedded software, Internet and

Java technologies to clients in the areas of industrial automation, medical

electronics and telecommunications. It focuses on the high—value, high-growth

areas of embedded technology and e-solutions to position itself high up on the

value chain. In the e-solutions sector, the company has core competencies in

technologies such as XML, Enterprise Java, Beans, Servlets and Java Server

Pages.

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The company has three software development centers located in Mumbai,

Bangalore and Calcutta. It achieved revenues of Rs 5.43 crore and reported a net

loss of Rs 2.51 crore in the first year, ended on June 2000, after

restructuring. As a result of the acquisition by TAIB and restructuring its

operations by focusing on the high-end software services, the company saw a

turnaround in the first quarter of the current year. In that quarter ended

September 2000, Mindteck achieved a turnover of Rs 2.45 crore and made profits

of Rs 85 lakh.

Mindteck India provides services to clients in the UK, Europe and Japan. At

present, it has 120 software professionals with almost 90% of them in offshore

development and the balance providing onsite services.

The company’s Calcutta center is focused on providing services in

e-commerce whereas the centers in Bangalore and Mumbai provide services in both

e-solutions and embedded technologies. The company has two facilities in

Calcutta, each about 3,000 sq. ft. The facility in Bangalore measures about

12,000 sq. ft and that in Mumbai is about 3,000 sq. ft.

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Mindteck India also has a 100% subsidiary in the US called Mindteck Systems

Inc. The company’s marketing activities are carried out through seven offices

in the US and through Mindteck UK, Mindteck Japan and Mindteck Singapore.

Interestingly, baring the subsidiary, the rest of the offices and companies are

owned by TAIB Bank. Mindteck only has a marketing arrangement with these

companies.

Future plans: Acquisitions

Mindteck India’s current size of operations is moderate when compared to

software majors, and the company has realized the need to grow and expand at a

much higher pace. In terms of services, Mindteck India would continue to focus

on its core competency in embedded technology–a niche sector characterized by

very high growths and margins. The company has planned out its future course of

action, which includes acquisition, tapping new clients and concentrating on

core areas of embedded technologies and e-commerce. To meet the working capital

requirement in the short term, the company recently came out with a rights issue

to raise Rs 12.50 crore. The rights were offered in the ratio of 1:4 at a

premium of Rs 90 per share. Notably, the share price of Mindteck during the

rights offer was below the offer price of Rs 100. Out of the total amount

proposed to be raised through the rights issue, the company earmarked Rs 8 crore

as the working capital and the balance for hardware and building infrastructure.

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Financials

(All figures in Rs crore)

 

1999

2000#

2001*

2002*

Revenues

2.64

5.43

13.48

25.60

Other Income

0.31

0.50

0.75

1.00

Operating Profit

0.08

-2.19

4.45

8.60

OPM (%)

-8.7

-49.53

27.42

29.70

Net Profit

-0.80

-2.51

3.80

6.50

Equity

20.00

5.00

6.25

6.50

EPS (Rs.)

-

-

6.07

10.00

# 15 months
* Projected (Without taking into

consideration the figures of Mindteck Consulting, which is yet to be

merged)

The promoters of the company, while subscribing to the rights issue, decided

to renounce a part of their rights entitlement in favor of the Employees Welfare

Trust. The trust intends to implement a share incentive scheme for the company’s

employees, which would help the company attract and retain the best talent and

improve its performance in future.

Among its other plans, Mindteck India and the Calcutta-based Nicco Infotech

are expected to merge, once the approval from the respective courts is received.

The merger ratio has been fixed at one share of Mindteck for 12 shares of Nicco

Infotech. Nicco Infotech is a part of the Nicco Group, USA, with offices in

India and New Jersey. Nicco provides training and implementation skills on the

Oracle ERP package and offshore development facilities. Nicco closed the year

ended June 2000 with revenues of Rs 97 lakhs and a loss of Rs 19 lakh.

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Mindteck also plans to acquire the US-based Mindteck Consulting, a part of

Infotech Holdings, subject to the approval of the RBI and other statutory

authorities. Mindteck Consulting provides software services to the US companies

and the acquisition will enable Mindteck India to acquire new clients and

business.

Financial front: Revival

Mindteck India’s financial performance in the past few years has been

disappointing, but the company has made amends in the first quarter of the

current year. It reported revenues of Rs 5.43 crore in the 15 months ended June

2000 compared to Rs 2.64 crore in March 1999. Net loss, after adjusting for

extraordinary items, in the same period stood at Rs 2.51 crore as compared to 80

lakh in March 1999.

In the first quarter ended September 2000, Mindteck India saw the turnaround

and reported revenues of Rs 2.45 crore and a net profit of Rs 85 lakhs. This has

been possible due to the restructuring process taken up over the past 12 months.

Mindteck is on the track of revival and is expected to close the year with

revenues of Rs 12 crore and profits of more than Rs 3 crore. The revenue and the

net profit could jump in the next year following the acquisition of Mindteck

Consulting. We expect Mindteck India to close year 2002 with organic revenues of

Rs 26 crore and a net profit of about Rs 6 crore. The equity after acquisition

of Mindteck Consulting would stand at about Rs 9.35 crore whereas the

consolidated revenues are expected to jump substantially. With the acquisition

of Mindteck Consulting, the management expects Mindteck to close year 2002 with

revenues of Rs 100 crore and a net profit of about Rs 15 crore. In view of the

pending acquisition and in absence of detailed financials of Mindteck

Consulting, we have not considered the same in our projections.

Investment potential: Limited

Mindteck (India) is currently traded at Rs 90 discounting projected June 2001

EPS by 14 times and June 2002 EPS by 9 times. The company’s shares were

trading in the range of 90-95 last months during the rights issue, which was

priced at Rs 100. The share price declined sharply in the last week of December

2000 in line with the selling pressure witnessed by infotech stocks in general

and the closure of Rights Issue in particular. With investors weary of infotech

stocks, the share price will move northwards only after the company announces

improvement in its performance. Moreover, we believe that the company needs to

take steps such as acquiring companies through which it currently has marketing

arrangements, to avoid any shareholder conflict. This would have some positive

impact on the valuations. The current trend in the stock market as regards to

the infotech stocks is lukewarm, especially towards the second and third rung

software companies. Considering the current sentiments, we believe that the

actual rather than the expected performance would drive the stock prices of

small- and medium-sized software companies. The next nine months of Mindteck

India are crucial as the company completely re-structures as well as expands

operations through acquisitions. While we believe in the management’s ability

in driving the business, considering the current sentiments and size of the

company, we do not expect a major return from the current levels. We feel that

the company’s shares are fully priced at the current level of Rs 90 and one

may take a view after the company completes acquisitions and consolidates its

performance. Under perform

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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