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Aptech: Questionable valuations?

Jun 12, 2001

Aptech brought the months long speculation to an end by announcing the demerger for its education and software business into separate entities. Hexaware Technologies a software company promoted by Mr. Atul Nishar, (also the promoter of Aptech) will be merged into the software entity. Therefore, now there will be two listed entities, one into education and the other into software. According to the company’s management, the training and the software business were separated, as the both the businesses were different and to create currency for mergers and acquisitions. Hexaware and Aptech’s software wing will merge to create an entity with revenues of US$ 60 m (Rs 2.7 bn) with 1,150 employees. The rationale behind this merger was that the combined entity would have the advantage of size. Aptech claims that the combined entity, which is yet to be named, will be the 11th largest software exporter in the country. This would offer advantage as initial queries from overseas clients to Nasscom, are for the top 15 to 20 exporters in the countries.

No doubt size would be an advantage. However, Aptech has to create a strong brand, as companies prefer to outsource projects to firms they have heard of and are known for quality.

According to the terms of the demerger Aptech’s stock will be split in the ratio of 3:2 in favour of the training and education company (for 10 shares of Aptech, 6 will go to the training wing and 4 will go the software division). Considering Aptech’s price of Rs 104 the market cap is Rs 31bn. The valuation of the training business is therefore, Rs 18 bn (60%) and of the software division is around Rs 12 bn (40%). It is these valuations that have raised concerns. The valuation according to the company was done based on the assets of the divisions. However, on March 31st, 2001 the cash with the training division was Rs 360 m and that with the software division was Rs 2,130 m.

(Rs m) Software Education Hexaware Combined (Sw
and Hexaware)
No of shares (no. in m) 12 18 10 22
Revenues (FY01) 699 3,964 1,540 2,239
Cash 2,130 360 59 2,189
Mkt Cap @ Rs 104 1,260 1,890 1,037 2,297
Net Profit (FY01) 161 654 270 431
EPS 13 36 - 19
P/E (assumed) 8 3 - 7
Price - 108 - 137

For the merger between Aptech software wing and Hexaware the ratio has been proposed at 1:3. For every 1 share of Aptech (face value of Rs 10) three share of Hexaware will be given (face value of Rs 10). Once the two companies are separated the education wing will have an equity base of Rs 181.5 m and the combined software division will have an equity base of Rs 221 m. Of this Rs 100 m worth of share will be given to Hexaware shareholders. Considering a market price of Rs 104 Hexaware has been approximately valued at a P/E of 4 times its FY01 earnings. Assuming a P/E multiple of 3x FY01 earnings for the education business and 5x for the software business the stock might be fully valued and there might be little scope for appreciation. It is interesting to note that day the announcement was made (8th of June, 2000) the price shot up to Rs 115 a gain of 10%. The stock has lost since then and is currently trading at Rs 107. The promoters stake in the education company will be limited to 26% but the stake in the software company will move up from 26% to 38%. Promoters’ holding in Hexaware is 50%.

On the education front business has been under pressure due to slowdown in the US economy. The revenues from Asset International had shown a 17% drop in 1QFY02 due to drop in registrations. This trend is expected to continue till the hiring picks up in the US markets.

At the current market price the stock is trading at a P/E 27x of its 1QFY02 annualised earnings.

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