The Hindu Business Line : Tata Infotech: Hold/Buy on decline

BUOYED by an improvement in fundamentals, shareholders can retain their investment exposures in Tata Infotech. Investors with a high-risk appetite may use any declines in the stock's price (10 per cent from current levels) to take fresh exposures for reasonable capital ppreciation. The stock trades at 12 times its annualised per share earnings.

There has been an all-round improvement in the revenues, operating profits and post-tax earnings of Tata Infotech in the first six months of 2003-04. During this six-month period, the company has already managed to register post-tax earnings of Rs 29.1 crore, which is only marginally short of Rs 30.4 crore recorded for the full year 2002-03. However, both revenues and post-tax earnings in the first two quarters of 2003-04 fell well short of the numbers logged in the fourth quarter of 2002-03.

Robust second quarter

The revenues and post-tax earnings of Tata Infotech have grown at a faster clip in the second quarter ended September 30, 2003 compared to the first. This healthy improvement is attributed primarily to the systems integration service segment, which contributes nearly 80 per cent of the company's total revenues.

The highlights of the financial performance of Tata Infotech are:

On a year-on-year basis, revenues at Rs 142 crore rose 38 per cent. The sequential (quarter-on-quarter) growth at 7.8 per cent was also fairly healthy.

Bolstered by a focus on overseas systems integration business and tighter control over key expenditure heads, the company recorded a sharp improvement in operating profit margins. On a sequential basis, the OPMs improved by 5.7 percentage points to 13.6 per cent.

On a year-on-year basis, the post-tax earnings recorded an over four-fold rise to Rs 17.1 crore. The sequential rise of 42 per cent was equally impressive.

Focus on systems integration

Systems integration services, manufacturing services and education services are the three business segments contributing to the revenue streams of Tata Infotech. Of these, systems integration contributed 78.9 per cent of the revenues, while manufacturing services at 16.8 per cent and education services at 4.3 per cent contributed the balance.

From this, it is evident that the financial performance of Tata Infotech is inextricably linked to the systems integration services segment. The company offers these services in both overseas and domestic markets.

On a sequential basis, while revenues from this business segment grew by 6.3 per cent, the profit before interest and tax contribution rose nearly three-fold to Rs 12.2 crore from Rs 4.8 crore in the first quarter.

However, three key factors are likely to dictate the sustainable revenues and growth of this business. One, this segment's linkage to the global economic environment is fairly strong.

IT spending is beginning to show signs of pick-up and that infuses some confidence in the future. But, any slowdown in spending and, thereby, longer decision cycles, can have a significant adverse impact on its financials. Two, systems integration business, by its very nature, is a lumpy business, which subjects it to fluctuations on a quarterly basis.

Three, Tata Infotech is increasingly facing competition not only from global systems integrators setting up shop in India, but also from top-tier Indian software companies which are moving into this turf.

These competitive pressures are evident both in the domestic and international markets. This may have the effect of capping the billing rates and operating margins on these contracts.

In the near term, the manufacturing services segment may help provide the stability to the company's revenue stream.

But given the capital and labour-intensive nature of contract manufacturing, it will have to contend with margin pressures in the niche electro-mechanical products business.

Article E-Mail :: Comment :: Syndication

Stories in this Section
Karnataka Bank's `Swarna Nidhi'

Touchtel cuts ILD rates

Big investments in mutual funds — Loaded against the retail customer

Why big investors bring in big risks

Will the November effect last?

Overseas acquisitions — Needed, information better and faster

Outsourcing backlash in the US — Time for a strategic rethink

Alliance Buy India: Sell

Prudential ICICI Flexible Income Plan: Avoid

HDFC Mutual Fund launches MIP

Canexpo: Pare exposures