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Stock Market Update (22 December to 7 January)

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DQI Bureau
New Update

The recovery in the markets last fortnight

continued with the BSE sensex moving up from 3541 to close the fortnight at 3659. The 118

point rise in the index has been prompted by the rising expectation that recovery is round

the corner and that India will not follow the rest of the Asian markets. India is

relatively less dependent on exports compared to the Asian Tigers and consequently, the

economy is insulated from a general slowdown in global trade. While the overall direction

of the index is upward one may see few downward plunges as the markets move out of the

bear spell.

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The economic recovery which was slated to

happen in the third quarter of 1997 seems to have eluded us once again. The Asian crisis

has hit exports while the political instability has affected the investment sentiment.

Consequently, the recovery is now expected only by the first quarter of the next fiscal.

The harvest from VDIS and likely increase in direct foreign investments with the safe

haven status of India would strongly assist the recovery process.

IT stocks were up once again. Thanks to the

rising level of interest in the sector. As we move out of the bear phase in the markets,

software stocks could move up rapidly in the next few months. A growing interest in Indian

software sector as well as the rising dollar would be the main drivers of such a move.

Major gainers of the fortnight included Altos, Pertech, and KLG Systel. Losers included

Mastek, Bureau of Information Technology, and PCS Industries.

International News

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Asian Crisis Hits Motorola



The Asian crisis is now taking its toll in the technology world as well. Motorola which
has been facing a slowdown in its semiconductor business is now smarting with its best

markets in a downturn. Motorola reported sales of $ 3.8 billion against $ 7.7 billion for

the same quarter last year. The company''s cellular sales which constitute over 40 percent

of the turnover grew by 18 percent while semiconductor sales grew by 11 percent for the

quarter. While the Asian markets which constitutes 28 percent of Motorola''s sales are

likely to be down for some time, the company is making investments in manufacturing

facilities in Taiwan as it sees long-term growth in the Asian markets.

SAP''s Growth Continues



Amidst widespread fears that the enterprise solutions market was slowing down, SAP''s
encouraging results are bound to glad many people. The German company reported that it

would show around 60 percent growth in sales over last year''s figure of $ 2.11 billion.

Most people feared that the Y2K problem had boosted the market which would decline as most

large corporations had already implemented such packages. The poor results of Oracle

seemed to confirm such fears as sales growth tumbled. However, now most analysts see the

poor showing of Oracle due to the changeover from Unix to NT and not due to a general

slowdown in the enterprise solutions market.

Netscape''s Problems Aren''t Over



Notwithstanding the problems of its arch-rival Microsoft with the justice department,
Netscape''s problems don''t seem to be over. For the quarter ended 31 December 1997, the

company is like to post losses and its sales growth will be less than 10 percent. The

company is likely to post revenues less than $ 110 million and will show losses at the

operating level. The company is increasingly concentrating on corporate sales as it finds

the going tough with the high penetration of Internet. The company is also implementing a

restructuring program which will reduce its workforce.

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Company Review

Infotech Enterprises Ltd: Mapping

The Future




The IT sector is not just an industry but a creator of many industries. No other sector
has the potential of creating industries which one day might surpass it in terms of size.

IT has done it. The Internet is not IT, its a whole new way of doing things the IT way,

and is likely to become the biggest industry in the world. In fact, Internet is not the

only example. IT has enabled the growth of many businesses which would not have been

possible otherwise. Further, it has changed the way of doing business in many industries

which today have radically different rules of game. Till recently, success in the banking

industry was driven by branch network, proximity to customer locations, and duration of

business hours. Today, with remote banking, most of these advantages have become

irrelevant.

Internet business is not IT, rather it is a

business which has evolved and grown because of technology. Some day in the future, it

might just get to be larger than any other business in the world. Similar is the story of

many other ventures which have been created due to technology, but do not strictly belong

to the computer world. As the sector has evolved, it has conceived a number of businesses

which use IT to provide a product or a service which would not have been possible

otherwise. The technological advances brought by the sector have given rise to a number of

new businesses which just use technology to make a task easier or cheaper. In the US,

there are a number of new businesses which have spawned by the Web. From online shops, to

information providers to investment services. All these businesses have no direct relation

with technology sector. In India too, IT is spawning new businesses.

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From marriage bureaus, astrology shops,

online placement agencies to transcription and digitizing services, IT is the basis for

the existence of many new Indian businesses. Digitizing services, which comprise GIS

mapping and Automated Mapping and Facilities Management (AM/FM) services, is an area where

India is zooming ahead. Though the value addition in the sector is relatively low, the

size of the market is exploding aided by privatization of telecom and power utilities who

are prime users of such services. Availability of remote data from satellites is also

generating demand for GIS services. Infotech Enterprises is among the top companies

operating in this area alongwith Rolta, ICES, and TCS. The company is moving ahead with a

major expansion plan after its public issue early last year. The Hyderabad-based company

is one of the few units which have been funded through IDBI venture fund scheme which

includes both an equity and debt component. Out of the Rs 5.22-crore equity, almost 47

percent is owned by promoters, while IDBI owns another 24 percent with public holding the

balance. The share listed on BSE has had a 52-week high and low of Rs 100 and Rs 50

respectively.

Background: Started With

Digitization




Infotech Enterprises, set up by BVR Mohan Reddy in August 1991, commenced operations in
September 1992. Reddy started his career with the DCM group in 1994. He later joined the

HCL Group in 1980. In 1982, Reddy joined OMC and became MD of the company before he left

it in 1992.

Infotech Enterprises did a modest Rs 36

lakh turnover in the first seven months of operations, ended 31 March 1993. In the first

full year of operations, the company made profits of Rs 24.40 lakh on a turnover of Rs

127.90 lakh. In the next three years, the company''s turnover grew rapidly to reach Rs

728.48 lakh by March 1997 showing a 79 percent CAGR. Profits moved even faster at 106

percent CAGR to reach Rs 216.30 lakh in fiscal 1997.

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The company tapped the capital market in

March 1997 for an expansion project of Rs 12.5 crore. The expansion plans include new

facilities for handling engineering consultancy, 3D modeling, and enhancing CAD/GIS

conversion capacity from 3.88 lakh hours per annum to 6.25 lakh hours per annum. The

company took out a public issue of 23.25 lakh equity shares of Rs 10 each for cash at a

premium of Rs 10 per share, aggregating Rs 4.65 crore. Of this, two lakh equity shares,

aggregating Rs 40 lakh, were reserved on firm allotment to NRIs and OCBs.

In the first half of the current fiscal,

the company posted profits of Rs 115 lakh on a turnover of Rs 396 lakh. Sales have grown a

modest 27 percent over the same period last year. However, the company expects the second

half of the current year to be substantially better than the first half both in terms of

sales and profits.

Operations: Moving Ahead



Infotech Enterprises is primarily catering to CAD/GIS Digitization services requirements
of overseas customers. The service, started in 1992, has today over 250 people and

contributes 85 percent to the turnover. Digitization services form a broad family of

services comprising various processes of converting pictorial data on maps and drawings

into digital information. Such services are being increasingly used by telecom and power

utilities, manufacturing companies, and government organizations for better utilization of

resources. The availability of remote-sensing data from satellites at low costs and the

privatization of the utilities have been the main drivers of this sector. While one may

think that such services are low-tech, there is an element of technical know-how and

project management skills which makes India ideally placed to tap this market. Major

players in the area include TCS, Rolta, and ICES, apart from a number of smaller players

mainly located in Hyderabad and Chennai. As technical advances take place, increasing

amount of data is being compiled in these digital maps making a valuable contribution in

areas as diverse as Land Use Management and Armed Combat strategies.

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InfoTech Enterprises has digitizing

capacity of around 5,00,000 manhours and has an ISO 9002 certification from BVQI, London,

for its Conversion Services Division. The major clients of the company in this area

include General Motors, Sabena, Ford Werke, Commonwealth Edison, and Etak Baltimore County

among others. These services are provided by a well-equipped infrastructure comprising Sun

SPARC and Intergraph workstations, and Pentium PCs, scanners, and digitizers. A shared 128

Kbps data communication link allows the company to transfer outputs to its clients.

The company has also commenced offshore

project services for overseas clients. In this area, it has developed some products and

utilities for Bentley Systems Inc., a leading developer of engineering software products.

Infotech has also developed its own products in this area which includes translators and

viewer of different CAD/CAM packages. In the GIS area too, the company has started doing

offshore projects and developed Map Management software products.

Not resting on its CAD/GIS expertise, the

company took over Systems Research Group for developing business application software. It

has now developed an enterprise-wide solution for the cement industry and for its on going

beta testing at a leading cement plant in India. The company plans to sell the package to

other cement plants both in the country as well as abroad. It has also moved into the

Internet/intranet arena with some export assignments. This team currently comprises around

50 people. The company, which has an alliance with IBM, is now looking for offshore work

in this area.

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Its domestic agency operations include

vending two families of products. The first is a range of simulation products from

California-based CACI Products Inc. Another tie-up is with Strategic Mapping Inc. whose

product: Smallworld, is a GIS utilities which can be customized to suit product/client

requirements.

Future Prospects: Moving To

Business




Infotech Enterprises is in the process of implementing a project which would take its
conversion facilities to around 625,000 manhours per annum and allow the company to

execute around Rs 10 crore of conversion jobs each year. The company has a healthy order

book of Rs 32 crore which is proposed to be executed over the next three years. Out of

this, Rs 27 crore came from Analytical Surveys Inc., a company engaged in providing

Digitization services to telecom and power utilities.

Project execution in Digitization services

is a major problem area for most companies mainly due to the high level of coordination

required not only between the vendor and the customer but also between the various teams

executing the job. Another problem area is the poor quality of drawings that are normally

provided by clients. With a successful track record and a quality certification, Infotech

is well placed to exploit the Indian advantage in this sector. The offshore business in

the engineering area also holds promise as the company has done projects for well-known

CAD/CAM companies and has developed its own tools and products in this area. As the CAD

market moves to the Wintel platform, it is expected to grow rapidly due to lower cost of

ownership. The growth is likely to generate demand for both offshore and on-site services

in this area.

The company is also hoping that its

non-engineering services, which today form only a small percentage of the turnover, would

contribute significantly higher in the coming years. While this may improve the company''s

turnover and profitability in the short run, it may also dilute its focus and affect

long-term competitiveness and profitability. The management, however, believes that the

current market growth in Y2K, ERP, and Internet solutions makes entry into these areas

worthwhile.

With the current order book and the

proposed expansion in capacity, Infotech should be able to maintain its growth rate at

around industry levels in the next two years. This, of course, is lower than what the

company has achieved in the past, but again that was on a much lower base figure. As the

market for ERP and Y2K solutions gets saturated in post 2001 AD, the company will again

have to rethink about its current strategies.

Financial Performance



As predicted the Infotech Enterprises sales growth in the next two years will be at par
with industry level. Unlike other companies in this phase of development, operating

margins are expected to remain stable for the next two years as the company will enjoy

better margins from its business solutions division. However, higher interest and

depreciation costs would dampen profitability growth to some extent.

The Infotech share currently changes hands

at Rs 81, discounting its estimated EPS for 1997-98 by 12.6 times. This is reasonably high

for a company with a moderate turnover and which has been listed only recently. However,

the strong promoter background, the interest of IDBI, and improving prospects with Y2K and

ERP projects have made the stock trade at a premium to its peers. Datastock expects the

company to enjoy even better premium as the markets look upward in the next few months.

Buy.

Sushanto Mitra

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