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Digital: A superlative performance

Jul 19, 2001

Digital has had an explosive start to the year. The company has posted a QoQ growth of 12% in revenues and 3.6% rise in net profits. On a YoY basis the topline has grown by 149% and the bottomline has jumped by 231%.The company's operating margins have declined by 60 basis points. While the staff costs for the company have gone up by 36% compared to 4QFY01, the transportation and miscellaneous costs have declined.

The performance is outstanding considering the fact that the software sector is going through troubled times.

Digital has managed to de-risk its revenues concentration from Compaq. The non-Compaq revenues have grown to 15% in 1QFY02 compared to 11% in 1QFY01. The figure was 12% in 4QFY01. This translates to a sequential growth of 40.5%.

(Rs m)4QFY011QFY02Change
Sales 626 703 12.4%
Other Income 27 29 9.0%
Expenditure 440 498 13.3%
Operating Profit (EBDIT) 186 205 10.3%
Operating Profit Margin (%)29.7%29.1%-
Interest -0.1-
Profit before Tax19121513.0%
Profit after Tax/(Loss) 185 192 3.6%
Net profit margin (%)29.6%27.3% 
Diluted number of shares32.732.7 
Diluted Earnings per share*22.723.53.6%
P/E (x)-21.5 

However, the US continues to dominate the company’s geographic revenue mix with a share of 80%. The contribution of Europe was 16% and the remaining revenues came from the Asia Pacific region.

The company’s results show trends quite similar to those seen in the results of software companies that have come in quite recently. The e-infrastructure and applications revenues along with those from the telecom segment have shown negative growth rates. However, Digital’s systems engineering services and the newly added enterprise solutions business have managed to keep the growth rates unscathed for the company. However, a drop in the revenues for certain segments could be due to the re-alignment of intra-segment businesses. Therefore, the second quarter will be very crucial. It remains to be seen if Digital can maintain the growth rates that it has shown before.

Service Offering4QFY011QFY02 
% of revenuesRs m% of revenuesRs mChange
eApplications51%31844% 309 -2.7%
Systems Engineering 21%13320% 141 5.8%
Enterprise Solutions N.A.N.A21% 148 -
eInfrastructure22%13712% 84 -38.4%
Telecom6%383% 21 -44.5%
Total 626  703 12.3%

The offshore-onsite ratio was 31:69 for 1QFY02 compared to 34:66 in 4QFY01. Therefore, Digital has a greater room to shift business offshore, which will improve the company’s operating margins. But due to the nature of the services it provides (mostly for Compaq), it may be easier said than done.

At the current market price of Rs 506, the stock is trading at a P/E multiple of 21 times 1QFY02 annualised earnings. The company is growing steadily and if it continues this kind of performance in the coming quarters, it might be upgraded to a top rung software company, which might cause the valuations to head further north.

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