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.
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
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.
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.
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.
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.
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.
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