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Digital to gain from HP-Compaq merger

Neha Kapoor

Digital has steady growth prospects and should see a 35 per cent increase in net profit this year.

MUMBAI, May 12

THE future seems bright for the Bangalore-based Digital GlobalSoft as the Hewlett Packard -Compaq merger gets under way.

Markets have adopted a positive outlook on the company and expect it to continue last year's trend of outperforming the industry to report an estimated 35 per cent bottom line growth in 2002-03.

``Digital stands to gain from the HP-Compaq merger. Growth in FY02 significantly outperformed industry, and in the near term, synergies with Compaq will drive FY03 growth as well,'' according to a CLSA Emerging Markets report on the Indian software sector.

Mr Nikunj Doshi, Head-Equity Research, Refco Securities Ltd, said, ``the company's top line is expected to grow more than the industry average at about 35 per cent. It will continue to benefit from its relations with Compaq, but non-Compaq business is also expected to grow this year.''

According to Mr Gurunath Mudlapur, Head, Equity Research, Khandwala Securities Ltd, ``Going ahead, Digital has steady growth prospects and should see a 35 per cent increase in net profit this year. Non-Compaq business which stands at around 15 per cent should also grow, though not too significantly; the figure should go up by three to four per cent.''

He added, ``The company's share price had moved up earlier gaining from the rally in second-rung tech stocks as well as in anticipation of the merger. The stock is reasonably valued at current levels, though there is still some potential upside. We should be looking at a target price of Rs 850 for the stock in the medium to long-term.''

Another long-term growth driver for Digital seems to be its recently announced BPO venture i.e. technical support centre with an approximate investment of $5 million and the projected growth to about 500 seats by end-FY03. ``It will take another two years at least for the call centre to gain critical mass and contribute significantly to the company's profits. Until then, its contribution to profits would range from two to five per cent,'' said Mr Mudlapur.

Even before the global merger actually took-off, there have been talks about the HP subsidiary, HP e-Solutions Division (HP-ESD), being merged with Digital GlobalSoft with a possible delisting of the latter. Analysts, however, consider the merger and delisting to be a remote possibility; there is very little overlap in the businesses of the two entities for them to be merged and the cost of delisting would be too high for it to be a viable option.

A report prepared by TAIB Securities Ltd, highlighting the differences between the two entities, said, ``Unlike Digital, which is a full-fledged services company, HP-ESD India is currently an in-house division of HP — has no direct exposure to external clients or onsite exposure as it is a pure off-shore unit whereas almost 68 per cent of Digital's FY02 revenues came from onsite activities. While HP-ESD is a profit centre, India operations are a cost-centre; hence its margins are not comparable. Digital is an independent company and a profit centre.''

``The chances of merger look remote as Digital is independently targeting non-Compaq clients and is involved in direct support of some of Compaq's products. Also, Compaq Global services has started marketing Digital as its offshore entity, with all prospective clients being introduced to Digital's offerings,'' the report said.

The report, however, added that in case the merger happened it would be positive for Digital expanding its service offerings on multiple platforms and widening its potential clientele.

From April 30, 2002, when a US court gave the go ahead for the HP-Compaq merger, Digital's stock has risen from Rs 697.65 on the Bombay Stock Exchange to Rs 743.45 on May 10, 2002, registering a gain of 6.56 per cent.

For the year ended March 31, 2002, Digital has reported a 71 per cent increase in net profit at Rs 92.7 crore (Rs 54.32 crore) and a 75 per cent increase in revenues at Rs 345.2 crore (Rs 196.9 crore). Compaq accounted for 85 per cent of the company's business.

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