X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Digital: Raring to go - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Jan 19, 2002

    Digital: Raring to go

    Digital Globalsoft Ltd. erstwhile Digital Equipment India Ltd. (DEIL), is a 51% subsidiary of Compaq. The company has successfully restructured itself from a hardware to an IT services company. The break neck speed at which the company has transitioned from selling services instead of hardware reflects a very capable management team at the helm.

    For FY02, the company is set to post a 70% plus growth rate in topline, a number that would make all software heavyweights green with envy. The sector itself is expected to grow at a more sober rate of 25% according to our estimates. Many would point to a growth on a lower base but the rebuttal is that it is the second rung software companies that have been the worst hit in wake of the slowdown in demand. For example Mphasis BFL that has revenues almost equal to Digital will most likely post a marginal decline in revenues for FY02.

    What makes this company so special? Firstly, its parentage. Being a subsidiary of Compaq, the company earns a significant amount of revenues (85% in 3QFY02) from services that it performs for the parent. The hardware giant, Compaq (revenues of US$ 33 bn in CY01), plans to increase the contribution from services to 33% of turnover in a span of three to four years from 20% currently. This would be a very big opportunity for Digital as it gets 70% of the work that is outsourced by Compaq from India. Compaq also outsources to other companies, which include Mphasis, TCS, and Wipro.

    Service offerings 2QFY02 3QFY02  
      % of revenues Rs m % of revenues Rs m Change
    eApplications 44.0% 384 42.0% 366 -4.7%
    Systems Engineering 18.0% 157 20.0% 179 13.9%
    Enterprise Solutions 22.0% 192 23.0% 197 2.6%
    eInfrastructure 11.0% 96 12.0% 106 10.4%
    Telecom 4.0% 35 2.0% 16 -54.2%
    Advanced Technology Group (ATG) 1.0% 9 1.0% 5 -42.7%
    Total   873   869  

    Compaq is the largest manufacturer of web servers. In FY01, the company shipped more than 1 million servers, giving it 27% market share worldwide. A large part of the services require getting these services up and running is outsourced to Digital as one of the company’s core capabilities is application re-engineering and migration. This is a big positive as large numbers of corporates still have software solutions running on platforms that are now considered to be ‘legacy’ systems.

    Digital’s expertise in Compaq platforms like OpenVMS and Tru64UNIX, gives it an edge over others. Thus, Digital has a two-fold advantage. Firstly, it is the preferred service provider and secondly, it has more experience in these areas compared to its competitors. Consequently, e-application is the largest revenues stream for the company. In 3QFY02, the contribution of this revenue stream was 42% to the total revenues. The e-applications service portfolio also includes application development and integration, and application management.

    The division is likely to see strong growth from areas likes integration and migration. For the last two quarters (2QFY02 and 3QFY02) Indian IT services companies have seen steep growth in revenues from these service offerings. This is due to the fact that being primarily offshore-driven, these services can be availed at very competitive rates. Thus, gives the client a high ROI as these services eventually benefit in terms of opportunity to lower costs and enhance productivity. Further, the trend towards consolidation of technologies (for example migration from VMS and VAX to Alpha servers) provides growth opportunities.

    The e-Infrastructure business unit (12% of revenues in 3QFY02) focuses on opportunities in outsourced IT-based business process solutions. The solution offerings include a wide range of Microsoft products, high-end technical support centres, enterprise management solutions, security solutions and high-end SAP solutions. Digital has been awarded ‘Single Global Infrastructure Implementation Partner’ status by Unilever.

    The offshore delivery partner agreement with Unilever has provided depth to the partnership. The company feels that there is a strong possibility that the size of this relationship will expand further. Increasingly large corporates in the west are working with a fewer vendors. Corporates initially offer a small pilot project to the vendor and on successful completion the project size is ramped up. This has been the case with Digital.

    Following the successful completion of the pilot project, the Digital team is now engaged on Unilever sites at locations in US and Europe. There is also an offshore component to the project. Services are being offered from offshore facilities in Bangalore. The business unit also bagged an order for global Windows 2000 deployment for a Fortune 500 company in the entertainment sector. Its services also include application packaging for automated desktop deployment for large enterprises. The division has commissioned an application services and packaging factory for a Compaq’s Operations Management Center in Europe.

    Digital is actively pursing a strategy to generate revenues from products as operating margins from the products business are comparatively much higher as compared to services. The company has adopted a very smart strategy of buying out existing products, upgrading them and reselling them. As of now the company has avoided creating products on its own.

    Digital in 1QFY02 purchased an electronic data interchange (EDI) product from Compaq along with its intellectual property rights (IPR). Digital plans to improvise this product based on the latest technologies like XML. It will continue to provide support to existing clients of the product, which includes Ericsson, Boeing, ABB, Phillips and Lego. This will also give Digital access to such large companies for marketing its service portfolio.

    In 3QFY02, the company acquired another product, a document management product from Compaq. This acquisition of ‘Compaq Archive’ was for a consideration of US$ 2.5 m (Rs 120 m). The product is an electronic information lifecycle management solution for managing storage and retrieval of critical information. Digital has acquired an existing product and now will invest in enhancing the existing product. The company will also provide services to integrate the products with the customers existing systems (like SAP R/3) in place. The other groupware the software can be integrated with are Microsoft Exchange, Lotus Domino and Documentum.

    Particular Wipro Infosys Satyam HCL Technologies Hughes Software Digital GlobaSoft
    RONW 34.0% 45.3% 59.8% 25.0% 31.4% 37.4%
    ROA 26.2% 36.8% 42.4% 23.6% 23.8% 28.4%
    ROIC 33.6% 45.3% 52.9% 25.0% 31.4% 37.5%
    Working capital to sales 40.7% 42.0% 42.0% 81.7% 62.6% 58.2%
    Current ratio (x) 3.3 3.5 4.2 6.7 3.0 3.3
    Debtor days (days) 73.0 58.1 112.3 100.7 95.4 67.4
    OPM 26.2% 40.2% 36.5% 50.7% 36.3% 27.2%
    Revenues per employee (Rs) 1,998,229 1,933,238 1,498,569 2,331,829 1,318,061 1,551,040
    Cost per employee (Rs) 424,696 730,122 288,466 459,400 389,104 563,400

    Not only does Digital have strong growth prospects, its financials are comparable to the best in the industry. However, the concern with the company is that its client concentration is very high and any unpleasantness in the relationship with Compaq could severely impact the company’s valuations. Perhaps this is the reason that Digital trades at a very subdued P/E multiple compared to its performance. At the current market price of Rs 579, the stock is trading at a P/E multiple of 21x its 9m FY02 annualised earnings. We expect the earnings to grow at a CAGR of 35% in the future. This translates to a PEG ratio of 0.6x. Thus, the valuation certainly looks very attractive over a three-year time frame.

     

     

    Equitymaster requests your view! Post a comment on "Digital: Raring to go". Click here!

      
     

    More Views on News

    Tech Mahindra: Our Revised View (Quarterly Results Update - Detailed)

    Aug 2, 2017

    A better than expected turnaround in performance results in a change in view.

    Wipro: A Decent Start to the Year (Quarterly Results Update - Detailed)

    Jul 27, 2017

    Digital services drive growth for Wipro in 1QFY18.

    Infosys: A Decent Start to FY18 (Quarterly Results Update - Detailed)

    Jul 14, 2017

    Infosys starts FY18 on an encouraging note with a stable performance.

    TCS: Currency Volatility Plays Spoilsport (Quarterly Results Update - Detailed)

    Jul 14, 2017

    TCS starts FY18 decently despite an adverse currency impact.

    HCL Tech: Ends FY17 on Expected Lines (Quarterly Results Update - Detailed)

    Jun 29, 2017

    Volvo partnership caps a good year for HCL Technologies.

    More Views on News

    Most Popular

    This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)(The 5 Minute Wrapup)

    Aug 17, 2017

    A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.

    The Most Important Innovation in Finance Since Gold Coins(Vivek Kaul's Diary)

    Aug 10, 2017

    Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

    It's the Best Time to Buy IT Stocks(Daily Profit Hunter)

    Aug 16, 2017

    The IT Sector could be in an uptrend till February 2019. Are you prepared to ride the trend?

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    TRACK DIGITAL GLO.

    • Track your investment in DIGITAL GLO. with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
    • Add To MyStocks

    MARKET STATS