Digital Equipment – In a transformation phase - Views on News from Equitymaster

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Digital Equipment – In a transformation phase

Aug 14, 2000

Ever since the merger of Digital Equipment Corporation, USA with Compaq Computer Corporation, USA in June 1999, Digital Equipment India Ltd. (DEIL) (now a 51% subsidiary of Compaq) has been in the midst of restructuring its operations all throughout. The company has phased out its hardware business and now totally focuses on providing software solutions. DEIL has lined up aggressive plans for growth and aims to become one of the best three software services company in India by 2003. In the past also when DEIL was in the business was hardware it was ranked among the top 2 in terms of PC server sales and top 5 in desktop revenues in 1998.

The company has targeted to achieve a turnover of Rs 5 bn by 2003 from the current Rs 613 m. For achieving this kind of growth, the company will be required to grow at the compounded annual growth rate (CAGR) of about 83%. However in the last 4 years, DEIL’s income from software services grew at a CAGR of 18.6% which is low compared to its peers in the software industry.

(Rs m) FY96 FY97 FY98 FY99 CAGR
Software Services 461 455 700 768 18.6%

Although the target set by DEIL seems bit high, looking at its previous track record, the company’s initiatives into value added software services will enable it to grow five fold. The company focuses on e-business solutions backed by its strong expertise in Internet technologies. The other area of interest is web enabling of legacy system, CRM and security.

DEIL derives more than 80% of its revenues form Compaq. This over dependence on one client proved to be a negative factor for the company’s valuations. The management has set a target to achieve a business mix of 50% from Compaq and 50% from non-Compaq business by 2003. But as the contribution from non-Compaq revenues starts increasing, its risk will be diluted.

At the current price, DEIL is available at a valuation that is certainly on a higher side as compared to NIIT. Historically the company’s P/E was in the range of 90-130 times which was due to the management quality. The company’s future valuations will depend on its ability to successfully generate the revenues outside the Compaq business and its marketing ability. This could bring a re-rating in the stock valuations.

Comparative Valuations
Particulars Digital NIIT Infosys Satyam
Market Price (Rs) 410 1,597 7,281 469
P/E (x) 48 43 168 84

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