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Tata Infotech: In murky waters - Views on News from Equitymaster

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Tata Infotech: In murky waters

Aug 22, 2003

Tata Infotech, in its June quarter, reported a dismal performance with topline falling by 14%, and profits by a substantial 47%, on a sequential basis. Importantly, the company has witnessed its margins decline by more than half over the period.

Rs m 4QFY03 1QFY04 Change
Sales 1,533 1,318 -14.0%
Other Income 19 64 235.4%
Expenditure 1,285 1,214 -5.5%
Operating Profit (EBDIT) 248 104 -58.0%
Operating Profit Margin (%) 16.2% 7.9%  
Interest 2 -  
Depreciation 33 28 -16.4%
Profit before Tax 232 141 -39.3%
Extraordinary items 0 0  
Tax 6 21 243.3%
Profit after Tax/(Loss) 226 120 -46.8%
Net profit margin (%) 14.7% 9.1%  
No. of Shares 18.4 18.4  
Diluted Earnings per share* (Rs) 49.2 26.2  
P/E Ratio (x)   10  
(* annualised)      

Decline in Tata Infotech’s topline is mainly due to disappointing performance in all its service offerings. While the systems integration (80% of total revenues) service’s revenues declined by 9%, the story was graver still for its manufacturing services where revenues declined by 34%.

Segment-wise breakup
Rs m 4QFY03 % of revenues 1QFY04 % of revenues Change
Systems Integration Services 1,162 75.2% 1,057 80.1% -9.1%
Manufacturing Services 331 21.4% 217 16.4% -34.4%
Education Services 53 3.4% 46 3.5% -13.3%

This performance seems all the more disappointing, specifically for the systems integration business, when we consider the fact that the market for this service is growing rapidly. This is due to the fact that clients are improving on efficiency fronts by integrating their diverse systems into a single system. Another concerning factor for Tata Infotech is the sluggish performance of its manufacturing services division, which provides contract manufacturing services to its clients for electro-mechanical devices. Declining revenues from the company’s education services business, which chiefly caters to training of corporates, is also a drag on the overall performance. The IT education and training business is one of the worst hit in the economic slowdown, and any improvement in the same will depend on the overall situation improving, and on the ability of the company to provide good quality of technical education.

Tata Infotech’s performance on the operational front has been equally dismal. While the company has managed to reduce its total expenditure, this reduction has been marginal relative to the decline in the topline, thus resulting into pressure on margins. In 1QFY04, operating margins for the company have fallen by 1,800 basis points, to levels very low when compared to other Indian software companies that have margins in the range of 20%-30%.

At the current market price of Rs 262, the stock is trading at a P/E multiple of 10x its annualized 1QFY04 earnings. Tata Infotech’s track record on performance has not been enthusing for quite some time now. Also, the company has very poor disclosure levels. Investors, thus, need to apply utmost caution.


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