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Aptech: Software blues - Views on News from Equitymaster
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  • May 8, 2001

    Aptech: Software blues

    For quite some time now, things have not been to working out for Aptech. Right from 3QFY01 the company’s software business seems to be in trouble. And then there was Mr. Ganesh Natrajan’s exit. For the 1QFY02 the company posted a YoY (compared to 1QFY01) 7% drop in revenues for its Indian operations.

    Of the net revenues 90% came from the training and education business, while the remaining 10% came from the software and consulting division. This translates to a YoY growth of 20% growth for the training and education business but a significant 69% dip for the software and consulting business. This has significantly changed the business mix of the company. In 1QFY01 the company earned 68% of its revenues from the training and education business and an impressive 32% from the software and consulting business.

    It is very surprising to note that inspite of the significant change in the business mix of the company the operating margins have not been affected. This could point to a fact that Aptech’s software and consultancy services were not very high up the software value chain. Traditionally, the education business always has had operating margins lower the software business. While the industry average of the software education business hovers in the range of 18-20% the average operating margins in the software industry is in the range 30-33% plus.

    (Rs m) 1QFY01 2QFY01 3QFY01 4QFY01 1QFY02
    Software revenues 226 236 84 82 69
    Growth (QoQ) - 4.4% -64.6% -2.0% -15.7%
    % contribution to sales
    from software
    31.2% 17.0% 12.0% 8.0% 10.3%

    Even if the company has managed to move up the value chain during the fiscal FY01 it has been hit by declines sales for its software services. In the 4QFY01 the company’s revenues from software business fell by a marginal 2% compared to 3QFY01. However, for 1QFY02 the company’s software related revenues have plunged 15% compared to 4QFY01. Therefore, the company is not only operating on low margins in the software business but is also finding it difficult to get business in this area. This dip could be attributed the fact the company has to develop a market for its software services in a tough business environment.

    On the other hand the company’s training and education business too seems to be running into rough weather. Compared to a YoY growth of 23% in 1QFY01, the company has managed a 20% growth in the education business for 1QFY02, which is marginally lower. Due to the media hype about job cuts in the US the prospects of the software education business might have taken a hit.

    To streamline operations Aptech has organised itself into two strategic business units: training & education, headed by Mr. Parmod Khera and software & consulting headed by Mr. Rusi Brji, who joined the organisation recently.

    In January the company had revealed plans to clock revenues of Rs 5 bn from the software group by end of FY03. Aptech planned to focus on health care and finance as verticals. Aptech's entire software operations were to be divided into six entities. The new divisions included global software services, e-business solutions, technology development, knowledge management, BconnectB solutions and IT-enabled services.

    The company has to take a serious look at it software and consulting business if it plans to meet its target of Rs 5 bn in software revenues by FY03. If things work the way they have been for the past few quarters the target might not be so easy to achieve. The question is will the new man in charge be able to Brij- the gap?



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