Stock Market Update(8th-21st January)

The ongoing recovery in the market was
stopped in its track as the index touched its 52-week low last fortnight. The BSE sensex
which closed at 3683 last fortnight fell to 3418. The main reason for this fall has been
continuous selling by FIIs and lack of liquidity in the market, thanks to the increase in
Cash Reserve Ratio by RBI. As the call money rates zoomed to 70-90 percent, a number of
funds moved investments from stocks to call money and treasury bills. The increase in
interest rates by leading banks also had a negative impact on the market as deposit rates
were increased.

The money market has been jolted by the
recent RBI measures to stop the downfall of the rupee. While the rupee has stabilized at
around Rs 38-39, bank lending rates have increased by 1-1.5 percent once again, which will
put further brakes on the slight industrial recovery witnessed in the first quarter of the
current year. With elections around the corner, political uncertainty and lack of decision
making at the center will further dampen investment activity. The much-awaited recovery is
now expected only in the second quarter of 1998.

Information technology stocks were down
reflecting a lack of interest by FIIs and decline in the index. Activity was thin and many
IT stocks had marginal trading during the fortnight. Datastock believes that as we move
out of the bear phase in the market, software stocks could move up rapidly in the next few
months. Quarterly results of Infosys and half-yearly results of Pentafour, 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 were Advanced Synergic, IIS Infotech, and
Zenith. Losers included Cals, Aftek Business Machines, and Altos.

International News

AT&T”s Downsizing Bears Fruit
Depsite a flat sales, AT&T has been able to improve profitability for the quarter
ended December 31, 1997. The company reported sales of $ 12.8 billion and profits of $
1.24 billion for the period. Profits grew 6 percent, thanks to reduction in operating
costs. Operating costs as a percentage of sales fell from 29 percent in the same quarter
last year to 28.4 percent. With the new CEO, Micheal Amstrong in control, analysts expect
a further improvement in margins in the coming quarter. Secular trends, however, portend a
further decline in long-distance traffic which has been a prime dollar earner for AT&T
for years. As the company downsizes and moves from the cost-conscious retail markets to
business markets, it will face flat if not falling revenues for a few more quarters.

Apple Keeps Losses Away
After a number of quarters of losses, Apple finally returned to the black for the quarter
ended December 26, 1997. The company reported profits of $ 47 million on sales of $ 1.6
billion. In the year-ago quarter, the Cupertino-based company made a loss of $ 120
million. Its profits were largely a result of the better market reception of the Power
Macintosh G3 computers, which allowed the company to ship over 1,33,000 units during the
last 55 days. While Apple may have won the battle of returning to profitability, its war
against itself continues as it becomes more of a niche product than an industry standard.
Something it has been aiming for long.

Is Digital Burning Bridges?
As Compaq”s $ 9.6-billion bid for Digital turns the sector topsy-turvy, Digital announced
excellent results for the last quarter. The company reported profits of $ 74.8 million on
sales of $ 3.3 billion. While profits were almost 35 percent higher than the corresponding
quarter last year, they reflect the gradual weakening of Digital”s position as competition
to the Intel platform to that of another vendor of Intel machines. The grand success of
its Intel NT machines whose sales were up by 94 percent against a 5 percent increase in
Alpha-based Unix machines clearly tells a truer picture of the company. At the same time,
Digital is moving toward services and this should further divorce it from its own
proprietary chip which with the agreement with Intel will be manufactured by Intel”s
facilities. With another divestment of its cabling business, and the Compaq bid, Digital
will now transform itself more as systems integrator than a vendor in the coming years.

Company Review

Rolta India Ltd: From Brawn To

The engineering automation market in India
is still limited by the high cost of solutions as well as a lack of interest among smaller
corporates to look at engineering solutions to meet customer requirements. The GIS
applications for utilities, which potentially could be a very large market, is still under
government control. This has slowed down the penetration of GIS in this sector. All this
could, however, change rapidly as the infrastructure sector gets privatized and the
liberalization forces manufacturing companies to look at product development from a
designing angle.

Rolta India Ltd is one player which has
assiduously worked in this market despite its relatively small marketsize compared to the
mainline hardware business as well as formidable competition from HP, Sun, and SGI among
others. Its technical collaborator, Intergraph, too has been hard-hit by competition and
made losses both in 1995 and 1996. Intergraph has now moved away from the proprietary
workstation model and is pursuing the price/performance strategy with the WindowsNT/Intel
platform. This move could potentially create a winner in Intergraph, fruits of which
should also go to its Indian distributor.

Rolta closed the calendar year 1996, which
coincides with its accounting year, with sales of Rs 76 crore and a PAT of Rs 20.88 crore.
The company is now once again reaching the size of a potential DQ Top 20 company as its
exports market starts zooming upward. For the six months period ended June 30, 1997 the
company posted a turnover of Rs 45.47 crore, which is almost 25 percent over the
corresponding period of last year. Net profit for the six months was Rs 12.55 crore as
compared to Rs 11.05 crore during last six months of the previous accounting period,
reflecting an increase of 13.5 percent.

Rolta has a large equity base of Rs 49.88
crore of which almost 38 percent is held by the promoters while another 15.5 percent is
held by institutional investors and NRIs. The balance is held by the public. The company”s
shares trade at Rs 16.50, with a 52-week range of Rs 25 and Rs 13.

Background: Growth With Dilution
Set up in 1981, the Rolta Group commenced business in dataprocessing and turnkey solutions
market. In 1985, the Group diversified into the CAD/CAE market and tied up with Intergraph
with an exclusive manufacturing and distribution agreement. Intergraph is a leading player
in the GIS and PDS (Plant Design Systems) market with over 8,500 employees. It also has
products for the CAD market. Till mid-1992, most of its workstations were based on a RISC
processor and Clix, its Unix implementation. Faced with increasing competition as well as
a realization that the Intel platform could provide a low-cost solution in the sector,
Intergraph has since then migrated its solutions on the Windows/Intel platform and more
recently to the Windows NT platform. Intergraph has a 100-percent subsidiary based at
Hyderabad which is engaged in R&D activities.

In 1989, Rolta India Ltd was incorporated
and the existing IT business of the Group was transferred to the company. The next year,
in 1990, Rolta made a public issue of shares as well as convertible debentures totaling Rs
20.75 crore. The company used the proceeds of the public issue to set up manufacturing
facilities for Intergraph machines. Resultantly, the company made a rights issue in 1992
at a premium of Rs 20 to part finance a Rs 30-crore Engineering Software Export Project.
The project involved setting up of a US subsidiary as well as a 50, 000 sq. ft facility
for undertaking Automated Mapping/Facilities Management (AM/FM) conversion jobs in India.
More recently, in 1994, the company made a preferential issue of 80 lakh shares to
FIIs/FIs at Rs 33 each. The company has also issued warrants to promoters of the company
which allows them to buy shares of Rolta at varying levels of premium. The first two
phases of warrant conversion are already over.

In the last eight years, sales of Rolta
have increased from Rs 4.77 crore to Rs 76 crore. Profitability too has gone up from Rs
1.05 crore in 1989-90 to Rs 20.88 crore in 1996. While profitability has grown 20 times
during the period, frequent issue of capital has stunted earnings per share of the
company, which has gone up from Rs 0.67 in 1989-90 to Rs 4.19 in 1996. Rolta also has a 75
percent joint venture in Saudi Arabia which is executing conversion jobs for the Saudi
Telecom Company as a subcontractor to AT&T.

Operations: Converting

Rolta operates both in domestic as well as exports market. Domestic operations comprise
almost two-third of the Rs 76-crore turnover posted by the company in 1996. They cover
hardware and software sales mainly in the area of GIS, PDS, and other M-CAD applications.
The GIS market is dominated by Government at the central, state, and local bodies level.
The Survey of India, Defense Ministry, and Telecom Department are the major customers. The
company also sells to local utilities and municipal authorities. The GIS market in India
is still in a nascent stage with remote sensing data being available only recently from
agencies such as National Remote Sensing Agency (NRSA). While the potential marketsize is
huge, Government has been slow to adopt the newer methods of utilities management
prevalent in the West. CESC, the electric utility company of Calcutta, is one of the first
utilities to use GIS information for its operations. In this area, with the strength of
Intergraph, Rolta is well placed to lead the market. Hardware vendors as well as players
like NIIT in tie-up with Arc Info are now entering this area.

The PDS market is more mature with a number
of corporates and consulting companies which use the products to design plants for both
new and existing projects. The company”s customers include large corporates and consulting
companies such as PDIL, BHEL, Engineers India, L&T, and Tata Chemicals among others.
The mainline mechanical customers include Bajaj Auto, Crompton Greaves, and Bayer. In this
market, there are a number of players including KLG Systel, HOPE, and Onward Technologies.

The main advantage that Rolta has is its
ability to offer complete hardware and software solutions on a low-cost platform. Among
first-time users of PDS/GIS applications, the total solution is a necessity. New vendors,
therefore, loose out at the entry stage. In the longer run, however, as the market matures
and the users become more comfortable with unbundled solutions, the competition faced by
Rolta is bound to increase.

In the domestic operations, Rolta has over
400 staff working at its head office as well as at a number of branch offices located
across India. In this business, direct selling is essential as awareness and interest have
to be created by the sales team before the client even considers the proposal. The selling
cycle is also long, sometimes over 12-18 months, which would be difficult to sustain
through a distribution network. As a consequence, operating overheads are substantial.

Since, Intergraph solutions are now
available on the WindowsNT/Intel platform, Rolta, in a bid to offer lower-priced solutions
also became a distributor for Dell in 1996. The aim behind taking up of the
distributorship was to ensure that Rolta could attack the lower end of the CAD/CAM market
as well as make forays into the mainline office automation market. Initially, plans were
drawn up for a dealer chain, but given the high cost of distribution, the company has
decided to use only the direct sales force for this purpose. It has also entered the
networking and Internet/intranet market to push its Dell alliance as well as the new line
of servers made by Integraph. With over 20 months down the line with Dell distribution,
the progress made in the direction is encouraging despite the relatively low margins in
this business.

Rolta has also developed a branch
automation package for the domestic banks called Robust. The product has an installed base
of 12. All these are located in the branches of Central Bank of India, Mumbai. The company
has also developed an MRP package called CIMPLER. The package, sold through its US
subsidiary, has largest installed base in Brazil.

Rolta”s software export operations comprise
providing conversion services for AM/FM. The services are conducted by over 600
professionals from its 50,000 sq. ft Mumbai facilities. The company has a 64 Kbps link to
its US and Saudi associates which can offer lower delivery times as well as better client
communication. This business area is one which is extremely price sensitive and India
because of its cheap technical manpower is globally competitive. While there are a number
of small players operating in the field only Rolta, with its large manpower and
infrastructure base and an IS0-9000 certification, has been able to compete successfully
with Global majors. The tie-up with Intergraph also ensures that it is represented in most
large tenders. Apart from the subcontracts that the company gets from Intergraph, Rolta
also competes independently for such jobs. At present, it has an order book of Rs 120
crore which is to be executed over the next three years. Its clients in this area include
Hong Kong Telecom, California Edison and All Tel, and AT&T. A recent order from US
West, valued at Rs 20 crore, is under execution.

Future Prospects: Higher Value

Rolta”s vision for 2000 AD is that of becoming a World-recognized leader in AM/FM
conversion services and the leading supplier of Plant Design and detailed Engineering
Services. In the domestic market, the company hopes to maintain its leadership in CAD/CAM
and Interactive Computer Graphics Solutions. It plans to address the segment of industrial
plant design and photogrammetry which provides higher value addition. In the near future,
the company will be focusing further into the Digital Multimedia market as its
collaborator has done. It also has plans to provide networking solutions in the domestic
market armed with a new range of servers from Intergraph.

In the exports market, Rolta is placed in
an enviable position vis-a-vis competition. With its low-cost, yet well-stocked
infrastructure, the company can hope to develop this area of expertise into a major
strength. The company”s strong customer base is expected to increase its software exports
by around 40-45 percent in the next two years. Rolta has plans to expand its facilities
from 50,000 sq. ft to 1.5 lakh sq. ft by 1998 at a cost of Rs 30 crore. The project,
expected to be completed in the current year, will be financed through internal accruals
as well as a debt component. To enhance its market reach and tap the potential in European
and Far East markets, Rolta has initiated steps to set up direct local presence in the
form of subsidiaries/offices in Europe/Far East besides opening additional offices in USA.
It is hopeful that its Europe office will start operations by March 1998.

India Ltd Financial Performance
Year Ended
31st December
Sales & Other
Operating Profit Operating
Margin (%)
PAT Equity EPS
1995 50.91 21.64 43 13.38 44.89 2.98
1996 76.31 28.29 38 20.88 49.89 4.19
1997E* 110.00 37.00 34 27.00 54.00 5.00
1998P* 155.00 52.00 35 45.00 54.00 8.3
* Projections

In the domestic market till currently, the
growth was limited due to the high cost of solutions as well as slow adaptation by
government agencies. Both these are changing now. Costs have been falling rapidly and the
private sector/MNC entry into the infrastructure sector will create a boom in the market.
While Rolta has the advantage of being one of the top players in the market, it will face
increasing competition as hardware vendors and software companies rush to enter this
emerging market. Hence, while sales will grow, profit margins will be under pressure. One
can expect this market to grow at 30 percent per annum in value terms for the next two
years. In volume terms, the growth could be in the 40 percent range as a result of falling

Beyond that period, a lot depends on the
success of Intergraph in general and its relationship with Rolta in particular. Given that
most MNCs have developed a multi-distributor model in India and that Intergraph”s products
are now available on open platforms, the chances of appointment of a new distributor in
India are fairly high. This period will also see a major jump in growth rates as
penetration increases with the private sector entry in the infrastructure sector in
general and telecom sector in particular.

Financials: Stable Margins
The financial performance of Rolta has improved in the last three years. During this
period, while sales growth has been around 50 percent, after-tax profits have grown faster
at 54 percent. At the same time, lowering hardware and software prices have ensured that
margins remain under severe pressure. The material cost/hardware sales has been moving
upward with a regularity. Also affecting performance, is high level of inventories and
receivable position which the company maintains. This is hurting cash flow position and
increasing interest costs for the company. The regular increase in the equity of the
company has severely dampened the earnings growth despite profitability increases.

In 1996, the company”s performance has been
good. Turnover has increased by almost 50 percent and after-tax profits have jumped by 56
percent, thanks to an increase in other income and a lower depreciation.
Investment Potential: Time Yet?

The Rolta share presently quotes at Rs
16.50, discounting its 1997 EPS by 3.3 times and less than its current book value of Rs
23.19. How does a company with reasonably good performance trade at such a low valuation?
The frequent equity increases as well as the issue of warrants to the promoters has
adversely affected the investor sentiment on the stock. Consequently, the stock has been
on the decline since 1995. With a jump in earnings expected in 1998, the present price
seems to be near bottom for the stock. Better 1998 earnings should help the company to
improve investor sentiment on the stock. Datastock had recommended ”wait” on the stock
last year and now rates the stock as ”hold”.

Sushanto Mitra
is an Equity Researcher
with Meghraj Financial Services (India) Pvt. Ltd, Mumbai.

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