Digital: Back after a short break - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

StockSelect
  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Digital: Back after a short break

Jan 30, 2003

Digital, as in the past, has posted strong revenue growth for 3QFY03. The net profits have jumped 26% sequentially, on the back of a 16% growth in revenues and improved margins. Earlier, the company's swift growth had hit a speed breaker due to the HP-Compaq merger. However, that seems to be a thing of the past. The topline and bottomline growth do not look impressive on YoY basis due to the fact that the company's growth had slowed down in the preceding quarters. Infact for 2QFY03, the company had reported a 23% sequential decline in net profits. For 3QFY03, the net profits have grown at an encouraging 10% YoY and the rise in revenues is 26%.

(Rs m) 2QFY03 3QFY03 Change 9mFY02 9mFY03 Change
Sales 949 1,100 15.9% 2,379 3,010 26.5%
Other Income 30 33 8.2% 83 118 42.4%
Expenditure 688 759 10.3% 1,623 2,115 30.3%
Operating Profit (EBDIT) 261 341 30.7% 756 894 18.3%
Operating Profit Margin (%) 27.5% 31.0%   31.8% 29.7%  
Interest 1 1 40.0% 1 1 50.0%
Depreciation 63 70 10.1% 83 185 122.9%
Profit before Tax 228 304 33.2% 755 826 9.4%
Tax 14 34 142.8% 94 66 -29.4%
Profit after Tax/(Loss) 214 270 26.1% 661 760 14.9%
Net profit margin (%) 22.6% 24.6%   27.8% 25.2%  
No. of Shares (eoy) (m) 33.0 33.0   33.0 33.0  
Diluted Earnings per share* 26.0 32.7   26.7 30.7  
P/E (x)   16.3     15.3  
*(annualised)            

The highlight of the performance was swift growth in revenues from the non-HP clients. While the revenues from the parent and clients billed through the parent grew 11% sequentially, the growth in non-HP business was much higher at 35% QoQ. The comparison of the revenue mix for 9mFY03 compared to 9mFY02 reveals, while revenues from the parent and clients billed through the parent have grown by 20%, revenues from non-HP clients have grown by 67%. Consequently, the parent's contribution to total revenues has declined from 85% in 9mFY02 to 80% in 9mFY03. Thus, Digital has managed to address one the biggest concerns - client concentration. During the quarter the company added of 29 new customers. Of these 24 were for its services and 5 were for the products business.

(Rs m) 2QFY03 3QFY03 Change 9mFY02 9mFY03 Change
HP 689 72.6% 786 71.5% 14.1% 2,025 85.1% 2,186 72.6% -
HP external 80 8.4% 70 6.4% -12.5%     233 7.7% -
Total HP related 769 81.0% 856 77.8% 11.3% 2,025 85.1% 2,419 80.4% 19.5%
Non-HP 180 19.0% 244 22.2% 35.6% 354 14.9% 591 19.6% 66.9%
Total revenues 949 100.0% 1,100 100.0% -1.2% 2,379 100.0% 3,010 100.0% 26.5%

The break up of revenues based on service offerings reveals a strong growth from the enterprises solutions business. This is in line the trend seen for the sector as a whole. Infact, software companies that have traditionally focused on the technology domain (like Wipro and HCL Technologies) too have changed their focus to tap the opportunity arising from the enterprise solutions segment. A large part of the Digital's revenues under this services segment comes from implementation of comprehensive solutions like ERP (enterprise resource planning) and CRM (customer relationship management) systems. Other software companies like Infosys and Satyam have classified this practice as package implementation.

One of our concerns regarding the impact of the HP-Compaq merger was its effect on Digital's Systems Engineering services. Digital's expertise in erstwhile Compaq platforms like OpenVMS tru64, UNIX and Itanium gave it an edge over others. However, with the merger of HP and Compaq there has been a rationalization in areas where there are similar offerings by HP and Compaq. This is likely to have caused the sequential decline in revenues from the Systems Engineering business. However, the company is also looking at developing new competencies in this domain. This includes HP's Office Server Suite and VMS-based Advanced Server Systems.

Service offerings 2QFY03 3QFY03   9mFY02 9mFY03  
Rs m % of
revenues
Rs m % of
revenues
Change Rs m % of
revenues
Rs m % of revenues Change
eApplications 394 41.5% 452 41.1% 14.7% 1,029 43.3% 1,225 40.7% 19.0%
Systems Engineering 180 19.0% 174 15.8% -3.3% 465 19.6% 539 17.9% 15.9%
Enterprise Solutions 217 22.9% 293 26.6% 35.0% 525 22.1% 751 25.0% 43.0%
eInfrastructure 104 11.0% 115 10.5% 10.6% 274 11.5% 323 10.7% 17.9%
Telecom 27 2.8% 29 2.6% 7.4% 72 3.0% 79 2.6% 9.7%
ATG & TSCC* 16 1.7% 23 2.1% 43.8% 10 0.4% 47 1.6% 370.0%
Products 11 1.2% 14 1.3% 27.3% - 0.0% 46 1.5% -
Total 949 100.0% 1,100 100.0% 15.9% 2,375 100.0% 3,010 100.0% 26.7%

Revenues from new growth initiative products and the call centre business continued to growth swiftly. However, both the businesses are making losses as of now. The call centre was initially offering its services to the parent. However, the company is now looking at independent clients.

At the current market price of Rs 535, the stock trades at a P/E multiple of 15x its FY03 estimated earnings. Considering the fact that the company may now be able to tap business from a larger parent, the growth potential is immense and valuations, therefore, appear attractive. However, a key concern is the future status of Digital. There are concerns that it might be merged with HP's India's subsidiary.

To Read the Full Story, Subscribe or Sign In
To Read the Full Story, Subscribe or Sign In


Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms

TRACK DIGITAL GLOBALSOFT

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

MARKET STATS