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Tata Infotech: Hit hard

Feb 1, 2002

Tata Infotech has posted a steep sequential decline in revenues of 18% for 3QFY02. This is due to the slowdown in demand for its systems integration and services business. The company managed to avoid posting a loss due to a significant tax reversal. The net profits have declined by 64% on a QoQ basis. On a YoY basis, the numbers look even more dismal. While the topline has declined by 22%, the net profits have climbed down by a sharp 74%.

(Rs m) 2QFY02 3QFY02 Change 9mFY01 9mFY02 Change
Sales 1,262 1,034 -18.1% 3,765 3,612 -4.1%
Other Income 20 14 -29.6% 43 51 18.7%
Expenditure 1,184 1,026 -13.3% 3,470 3,430 -1.2%
Operating Profit (EBDIT) 77 7 -90.8% 295 183  
Operating Profit Margin (%) 6.1% 0.7%   7.8% 5.1%  
Interest 4 3 -22.9% 23 10 -55.1%
Depreciation 40 40 0.0% 136 122 -10.1%
Profit before Tax 53 -22 -141.3% 179 101 -43.6%
Tax (6) (44) 590.5% 39.7 (35) -187.4%
Profit after Tax/(Loss) 60 21 -63.9% 140 136 -2.7%
Net profit margin (%) 4.7% 2.1%   3.7% 3.8%  
Diluted number of shares (m) 18.4 18.4   18.4 18.4  
Diluted Earnings per share* 13.0 4.7     10  
P/E (at current price)   22.0     14.6  

The company’s operating margins have taken a hard hit and have declined to a dismal 0.7%. This is due to the fact that company has not been able to lower its costs in line with the steep fall in topline. To counter the tough business environment Tata Infotech has increased its marketing efforts in the US and Europe. It has also under taken major cost reduction measures, which includes lay offs. However, these measure are expected to show results only in the next financial.

Considering the fact that the company earns almost 83% of its revenues from the services and systems integration business the margins are very low. This could be due to the fact that the company derives a significant portion of its income from the domestic markets for which realisations are lower. The remaining part of the revenues comes from the manufacturing services (9%) and the company’s education business (8%).

At the current market price of Rs 144, the stock is trading at a P/E multiple of 15x its 9mFY02 annualised earnings. The valuations are likely to remain stagnant, as the company is likely to post similar performance in the next quarter.

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