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Aptech: Where is the value? - Views on News from Equitymaster
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  • Mar 1, 2001

    Aptech: Where is the value?

    Aptech’s recent plans to separate it's software business from its education business has not augured well with the investor community. On the 21st February, Aptech had announced that it was de-merging its software business. The company has listed a few possibilities like merging the software division with Atul Nishar promoted Hexaware Technologies Ltd., and either creating a separate business unit or creating two separate listed companies one into education the other into software and consultancy. However, there might be a possibility of this division be merged into Hexaware. Hexaware is an unlisted company. It is this fear that gripped the market when the news about the de-merger was announced.

    If the worst fears come true then the immediate question is what should be the valuation for Aptech? It very difficult to answer, as we do not have a pure software education company listed in India. All the major companies in this line of business (NIIT and SSI) have a blend of education and software. But we can work the other way round. With so many software companies listed the software business can be valued and if this is subtracted out of the current market price that should give a good indication for the price for the education business.

    To value the software business the market cap for the software business was estimated using market cap to sales ratio. The market cap to sales ratio is quite varied for different software companies. The figure for Digital was about 16, Satyam was 7 and Mphasis was about 3. Therefore, mostly software companies have a market cap to sales ratio grater than 1.

    Aptech clocked Rs 4,663 m in revenues this year. Aptech’s business mix is 15% software and 85% education. Therefore the sales for the software business would be Rs 699 m. At Rs 221 and with 30.3 m shares the market cap for Aptech is Rs 6,696 m.

    Mkt cap
    to sales (x)
    Mkt cap
    software (Rs m)
    No of
    shares (m)
    Share price
    (Rs) (Software)
    Mkt Cap
    for education (Rs m)
    Price (Rs)
    1 699 30.3 23 5,997 183
    2 1,399 30.3 46 5,297 160
    3 2,098 30.3 69 4,598 152
    4 2,798 30.3 92 3,899 129
    5 3,497 30.3 115 3,199 106
    6 4,197 30.3 139 2,500 82
    7 4,896 30.3 162 1,800 59
    8 5,596 30.3 185 1,101 36

    However, a few things that have to be factored into the price for the education business. Firstly, the fact that Aptech is one of the best brands in the computer education business in the country and has been in the business for a long time. Considering this in light of the demand for software professionals, which is expected to grow exponentially the business looks to have good growth prospects.

    However, the factors that discount the above positives are that firstly, the sector has a low entry barrier and hence is fiercely competitive. Another fact that would go against Aptech, is the fact that the company is in the premium segment of the computer education business. Though the operating margins are low for the computer education industry as a whole its very difficult to maintain margins in the premium segment. Again the discount segment plays the volume game a comfort that the premium segment does not have.

    Hexaware is merged into Aptech then the valuation would be an easy affair. However, if the worst comes true then the decision for the investor’s is whether they are willing to put their money into the computer education business or not. An industry that is not so exciting as software but nonetheless has good prospects.



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