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Ramco: Tough times - Views on News from Equitymaster
 
 
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  • Jul 4, 2001

    Ramco: Tough times

    Ramco is amongst the very few software companies in India to have developed, marketed and implemented branded software products in the global market. Initially, Ramco started with an ERP product (Marshall), which was targeted at the small and medium enterprise segment in the country. But the product was not a roaring success. And since then the company has been looking at other areas for growth. Though Ramco’s focus is still enterprise solutions, its present offerings are a portfolio of products and services targeted at the collaborative commerce (c-commerce) market.

    C-commerce involves the integration of B2B (business to business) commerce and B2C (business to consumer) commerce along with the company’s enterprise management system. Thereby, creating a virtual trading community in which the customer, suppliers and the company interact electronically, thus, making the interaction faster and more efficient. This results in lower inventory, faster delivery and better customer relations for the enterprise. The trading community could be an industry, industry segment, supply chain or supply chain segment.

    However, the concept is far fetched. E-commerce is not ‘the’ answer to supply chain needs of an enterprise. It is just another answer. This fact coupled with the slowdown of the US economy has led to the curtailment of US IT spends especially towards e-commerce projects.

    Other than enterprise solutions, Ramco’s other offerings include networking solutions and projects & consulting services (on-site and off-shore development projects). One of the verticals that Ramco is strongly focused on is the airline vertical. In April it tied up with Boeing to provide solutions for the aviation industry. The span of the engagement is expected to be about 15 years, generating revenues in the range of US$ 150 m to US$ 600 m over a five year period for Ramco.

    Ramco’s clients
    Enterprise Solutions Systems Integration Enterprise Process
    Solutions
    Projects & Consulting
    BOEING, USA Stock Exchange,Mumbai Grasim Industries Fortune 500 companies
    Sunkist Growers, USA Indian Oil Dalmia Cements Mid market companies
    Columbia Helicopters, USA Amara Raja Batteries Zuari Cements Internet startups
    Swatch AG, Switzerland Ericcson Shree Cements  
    Migros, Switzerland Coca-Cola Madras Cements  
    Radisson, UK Air Freight    
    Intel, Malaysia, Philippines Hughes Escort    
    Faber Medi Serve, Malaysia Oil & Natural
    Gas Commission
       
    Numaligarh Refineries, India National Thermal
    Power Corporation
       
    ICICI, India Tata Institute of
    Fundamental Research
       

    Ramco posted a powerless performance for FY01. While the software sector managed to grow by more than 55%, the company managed a topline growth of just 4%. What was far more disappointing was the fact that the company saw operating margins fall by a huge 10.5% during the year. This was mainly due to a rise of 65% in staff costs for the company. The staff costs have gone up from 16% of revenues in FY00 to 26% of revenues in FY01. The company’s operating profits dipped by 48% compared to FY00.

    The company managed to ensure profitability due to an other interest component of Rs 67 m excluding which the company would have posted losses. The other income comprises mainly of interest received to the extent of Rs 50 m (compared to Rs 2 m in FY00) and foreign exchange gains to the extent of Rs 16 m (compared to Rs 3 m in FY00).

    (Rs m) FY00 FY01 Change
    Sales 1,161 1,202 4%
    Other Income 11 67 508%
    Expenditure 919 1,077 17%
    Operating Profit (EBDIT) 242 125 -48%
    Operating Profit Margin (%) 20.9% 10.4%  
    Interest 85 21 -75%
    Depreciation 158 160 1%
    Profit before Tax 11 12 15%
    Tax 1 2 36%
    Profit after Tax/(Loss) 9 10 12%
    Net profit margin (%) 0.8% 0.9%  
    No. of Shares (eoy) 78 78  
    Diluted Earnings per share 0.12 0.13 12%
    P/E (x)   954  

    One of the reasons for Ramco lower than industry performance could be the fact that it does not have any industry specialization or focus other than the aviation industry. Most of the software companies are very focused on verticals like BFSI (banking, financial services and insurance) or the telco (telecommunications) segment. Also, the enterprise solutions market is very crowded and therefore, the competition is fierce. The players include SAP, Peoplesoft and most of the top software companies in the country like Wipro, Satyam and Infosys.

    The company plans to grow to a size of US$ 250 m by 2005, this translates to a CAGR of 73% based on FY01 revenues. However, this number could be for the global revenues. As per US GAAP consolidated statements Ramco reported US$ 45 m revenues in FY01, which is almost 80% higher than the figure reported in the Indian accounts. Therefore, the additional revenues could be from a subsidiary. Even considering the US GAAP numbers, the required CAGR comes to be around 53%.

    Either ways the company is looking at a very steep target. The question is, what is Ramco banking on that would give it the edge to post such a performance? We could not come up with anything to concur with the company’s confidence.

    At a market price of Rs 128, the stock is trading at a P/E multiple of 954 times its FY01 earnings.

     

     

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