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Tata Infotech: Slowdown takes toll

Jun 10, 2002

The slowdown in the software business has adversely impacted Tata Infotech’s financials. The company has posted an 8% decline in revenues for the fiscal ’02 and the fall in bottomline has been steeper at 23%. Operating margins heading south due to a 12% rise in employee costs is primarily responsible for the significant drop in net profits. While the performance for the year has been disappointing, the 4QFY02 numbers could bring some cheer. On a sequential basis the revenues grew by 11%, while the net profit margin jumped by a significant 222%. Comparing the quarterly numbers on a YoY basis, could point to the worst being over for the company. The revenue declined by 17%, while the fall in net profits was 44% in 4QFY02 (on a YoY basis). The improvement in business environment becomes evident when 4QFY02 numbers are compared to the YoY decline in topline and bottomline in 3QFY02, which was 23% and 74% respectively.

(Rs m) 3QFY02 4QFY02 Change FY01 FY02 Change
Sales 1,034 1,146 10.8% 5,151 4,756 -7.7%
Other Income 14 29 104.3% 86 82 -4.1%
Expenditure 1,026 1,114 8.5% 4,688 4,544 -3.1%
Operating Profit (EBDIT) 7 32 345.1% 463 212 -54.3%
Operating Profit Margin (%) 0.7% 2.8%   9.0% 4.4%  
Interest 3 2 -18.5% 30 12 -58.7%
Depreciation 40 39 -4.7% 177 161 -9.3%
Profit before Tax (22) 19 -188.6% 341 121 -64.7%
Tax (44) (50) 14.3% 76 (84) -211.1%
Profit after Tax/(Loss) 21 69 221.9% 265 205 -22.8%
Net profit margin (%) 2.1% 6.0%   5.2% 4.3%  
Diluted number of shares (m) 18.4 18.4   18.4 18.4  
Diluted Earnings per share* 4.7 15.1   19.3 14.9  
P/E (at current price)   16.0     16.2  
*(annualised)            

Tata Infotech’s systems integration business was responsible for the topline heading south. Revenues from the business fell by 12% in FY02. This fall was partly offset by a 61% growth in the manufacturing services business and a 23% growth in revenues from the education services business. A growth in revenues for the education business is commendable considering the fact that the education majors like NIIT have seen a decline in revenues during the fiscal.

Segmental revenues (Rs m) FY01 FY02 Change
Systems integration 4,623 89.8% 4,031 84.4% -12.8%
Manufacturing services 253 4.9% 406 8.5% 61.0%
Education services 276 5.3% 340 7.1% 23.3%
Total 5,151 100.0% 4,777 100.0% -7.3%

It is interesting to note that of the three businesses, the manufacturing services is the most profitable. The margins from the systems integration business were dismal, while its education business made losses.

At the current market price of Rs 241, the stock is trading at a P/E multiple of 16x its FY02 annualised earnings. While the company’s performance does not merit such valuations, the possibility of a merger with other Tata Group companies could be reason behind high valuations being accorded to the company. In event of the expected merger not coming through the stock price might witness a downward correction.


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