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Tata Infotech: Good plans but…

Aug 9, 2002

Tata Infotech is one of the very few technology companies that totally missed out on the IT services boom. Over the past four years (FY98-FY02) the company has a clocked a topline growth of 11%, much lower than the figure for the IT industry in India, which is about 55%. What is more disappointing is the fact that company’s profitability has steadily eroded during the period, declining at a CAGR of 24%. There are a number of reasons for the company’s poor performance. Firstly, its business mix. The company’s service offerings include system integration services (84% of revenues in FY02), education and training (7%) and manufacturing (8%). The disappointing performance stems from the fact that revenues from the education business declined by 3% and 32% in FY00 and FY01 respectively. Another reason for the company’s woes was its client concentration. Infact in 1998 almost all of its export revenues were from Unisys. And decline in revenues from Unisys caused Tata Infotech’s financials to take a hit. The company’s operating margins at 4% in FY02 stand lower than most of the manufacturing firms in the country.

Growth FY99 FY00 FY01 FY02
Manufactured systems 26.3% -31.0% -8.0% 60.6%
Systems integration 21.9% 13.9% 30.7% -12.8%
Education & training 16.2% -2.8% -32.8% 23.2%
Total 21.7% 7.5% 22.0% -7.3%

However, the company has taken a number of steps to reduce the bottlenecks in its performance. Firstly, it has significantly reduced it concentration on Unysis by adding a number of clients. Tata Infotech sees the next big growth opportunity for its software services business from healthcare market. In FY01, 34% of the revenues were from IT services rendered in domestic markets. The clients were mostly government organisations. The Tata’s have further strengthened their presence in the segment with the acquisition of CMC, which was a PSU. Now Tata Infotech can leverage on CMC’s relationship with government institutions for improved revenues.

For growth in its hardware business, the company is focusing on emerging technologies and plans to offer services in the area of embedded systems. Tata Infotech is also looking at its education business for future growth. The company plans to enter offer IT education services globally. Thus, expanding into virtually untapped markets. Other plans for growth in the education business includes plans to offer courses in emerging opportunities like IT enabled services.

Read our research report on Tata Infotech.

Inspite of all the efforts Tata Infotech has posted a loss of Rs 11 m for 1QFY03. This is due a steep fall in revenues during the quarter. On a sequential (QoQ) basis the company’s revenues have declined by 16%. The numbers look equally disappointing when compared on a YoY basis. The topline has declined by 27%. The company in 1QFY02 had posted a net profit figure of Rs 54 m.

The company’s performance was once again disappointing. However, its plans to grow have merit. Also, there is a possibility of strong growth in the future for the IT sector as a whole and the company might be able to benefit. More importantly, in the recent past there has been a change in the top management. This might auger well for the company in the future. However, before considering the stock as an investment option it needs to show a continuous and consistent improvement in performance instead of just plans for growth.

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