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Digital: Rapid growth - Views on News from Equitymaster
 
 
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  • Jan 22, 2001

    Digital: Rapid growth

    Digitalís performance in 3QFY01 is highlighted by a sequential growth of 30% in revenues and a 6% increase in operating margins. The feat by all counts is commendable. One of biggest positives about Digital is its quality of management. The team has a right mix of talent and experience. The performance is more than evident from Digitalís 3QFY01 results.

    If we look at the performance of the company in the current fiscal itís revenues have jumped from Rs 283 m in the first quarter to Rs 526 m in the third. This means it has already clocked a growth of 98% in three quarters compared to FY00. The companyís operating margins have gone up from 15.5% in 1QFY01 to 31.4% 3QFY01.

    The major concern with the company still looms, as 87% of its business comes from Compaq. The figure has not changed significantly since the last quarter. The company is trying to de-risk its client concentration. The non-Compaq revenues grew by 66% compared to 2QFY01, while revenues from Compaq grew by 26%.

    Digital : Due diligence

    The geographic break up of revenues changed with contribution from the US coming down from 82% in the last quarter to 79% in 3QFY01. The sales to Europe grew by 4% compared to 2QFY01. The figure stood at 17% of the revenues. The remaining revenues were from the Asia Pacific region. Decrease in the contribution from the US may be due to an effort to de-risk business from the region.

    The onsite contribution was up to 68% compared to 65% in 2QFY01. The offshore contribution was 32%. This change in onsite-offshore mix did not affect the operating margins, which on the contrary went up.

    (%) of revenues from 2QFY01 3QFY01
    e-Applications 52 48
    System engineering 22 20
    e-Infrastructure 21 25
    Telecom 5 7

    Digitalís e-Applications division implements solutions in the area of enterprise applications integration with CRM (customer relationship management) software from SAP and Siebel. The contribution of this segment to the revenues is down 4%. This along with e-Infrastructure can provide Digital a steady stream of revenues for sometime to come.

    The systems engineering group that works with operating systems provides services to Compaq. This area could be a niche for Digital and considering the size of Compaq the potential to grow is healthy.

    Telecom group focuses on area like WAP, Bluetooth and wireless LAN (local area networks). Digital has prestigious clients like Sony and NEC for this group.

    Digital it seems all set to make it to the big league. The concern, which it needs to address, will be de-risking its client concentration. It recently completed acquisition of 20 acres of land to develop infrastructure for housing 4,200 software engineers. This is in addition to about a 1,000 odd already working for the company. This gives an indication of the pace of growth, which Digital has set for itself.

    At a current market price of Rs 615 the stock is trading at a P/E multiple of 42.4 times its 9 months annualised earnings in FY01. In light of this the stock may see positive activity in the days to come.

     

     

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