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Tata Infotech: Losing to diversification? - Views on News from Equitymaster
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  • Apr 2, 2001

    Tata Infotech: Losing to diversification?

    Tata Infotech has quite a diversified portfolio of services and products. The company is into software development, hardware and education. The combination is quite unique. And the company plans to grow based on all the areas it is into.

    The software business of the company is divided into the domestic (35%) and the international (50%) business. The company has a wide variety of service offerings in the software business, which include e-commerce solutions, re-engineering & systems software, security and legacy systems. The company expects the international division to be the major growth driver.

    Tata Infotech has made changes in the way it used to manage its education business. Though it is continuing with the franchisee model, the company has decided to show more interest in the business and work closely with the franchisees. It plans to improve the quality of services delivered by providing faculty to the franchisee and the taking a closer look at the content. Because of the restructuring in the education business the performance took a dip last year. However, the company is expecting a growth rate of 20% for the current year post restructuring.

    The hardware division of the company makes electro mechanical devices. The major product is for Unisys that is used for cheque processing. The company has chosen a niche area for its hardware business, which incidentally requires a lot of manual input.

    Unisys has been one of the major clients for Tata Infotech and the company had been negatively impacted when Unisys went in for restructuring. The company had seen a lot of attrition in FY00. Lower business from Unisys forced Tata Infotech to bench many employees. The company had expected this attrition rate to go down. However, due to anticipated business from Unisys not materializing, the company faced an employee exodus once again. The company had about 2,700 people in the system integration division (software business) and had according the company the utilization was some where in the range of 89% for the software business. But reports in the certain section of the press indicate that about 700 people have left the company. This has bought the number of employees in the company down to 3,300.

    Tata Infotech: Slow, but steady?
      1QFY01 2QFY01 3QFY01
    Growth (QoQ) 2.8% 23.0% 0.1%
    Operating Profit Margin (%) 2.5% 7.5% 9.7%
    Net profit margin (%) -0.8% 4.9% 6.3%

    Tata Infotech that has 85% of its business from software has not shown topline growth nor operating margins anywhere near its peers in the industry. However, one of the possible explanations is the fact that 15% of the revenues comes from education and hardware. Even if we consider this, the operating margins are still way below industry standards. But the margins have been rising every quarter, albeit marginally.

    Tata Infotech needs to take a hard look at what it wants to position its self as: whether as a hardware company, a software company or an education company. Obviously this very diversified portfolio is not doing wonders for the company.



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