Digital: Parental blues - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Digital: Parental blues

Oct 1, 2002

In FY02, the software sector clocked a subdued 22% growth. However, Digital closed the fiscal with a steep 79% growth in topline. This was due to the strong growth in revenues (73%) from its parent Compaq (now new HP). However, with the merger for Compaq and HP, what was one of the biggest strength for Digital, became one of the biggest concerns. While the merger created a US$ 87 bn giant parent (compared to US$ 47 bn Compaq), the apprehensions stemmed from the fact that HP already had a 100% subsidiary in the country, HP India. To list a few of the concerns, will the parent want two subsidiaries in a country? What if the two entities are merged? Will the merger ratio in case of a merger be favourable to minority stakeholders?

But Digitalís management has taken a more optimistic stand on the course of events. The management feels that it has a now a larger parent to get business from. Infact, it has already started getting business from the parentís clients and leveraging on new HPís sales force. The apprehensions regarding the merger were strengthened as Digital saw the weakest growth in revenues from its parent in 1QFY03. The revenues from new HP that account for 83% of the companyís revenues grew by 1% sequentially (QoQ). This was immediately after the merger. Digitalís counter to this is that the lower growth in revenues from the parent is due to the fact the things are in a state of flux as the two companies are sorting out merger related issues.

However, going by what the management has indicated a lot could be expected from the company since this allays fears regarding loss of business from HP in the future. When it comes to positives, Digital has quite a few. Firstly, the companyís past performance. It has swiftly managed to transition from a hardware company to an IT services company, almost without any glitches. The second strong investment argument in favour of the company is its portfolio of offerings. Digital has a well-diversified revenue stream that spans across development, migration, re-engineering, IT-infrastructure services, implementation services and systems engineering. The company has also forayed into the call centre business. Finally, the company has been aggressively looking to de-risk its revenue concentration from its parent. Infact, the non-Compaq revenues grew by 138% in FY02. In 1QFY03, the company added 28 new clients (excluding 20 annual maintenance contracts that the company bagged).

At the current market price of Rs 552, the stock is trading at a P/E multiple of 17x its FY03 estimated earnings. The uncertainty regarding the future prospects will continue to depress the valuations in the near future. However, the company has proved itself and performed excellently in the past. Therefore, if the impact of the merger is positive, then the stock could see a significant improvement in valuations. However, the element of risk is significant.

We have recently updated our research report on Digital. The investment arguments and concerns are discussed more elaborately in the report and are supported by three-year forward financials. (Read Digitalís research report)

Equitymaster requests your view! Post a comment on "Digital: Parental blues". Click here!

  

More Views on News

If You had Invested Rs 1 Lakh in TCS in 2011, this is how Much You Would have Today (Views On News)

Nov 30, 2021

Did TCS perform better than the market and its peers?

India's Top 4 IT Companies are Struggling. Here's Why... (Views On News)

Oct 22, 2021

As attrition rates are unbelievably high, top Indian IT companies are going for big-ticket raises, and much more hiring this year.

Infosys had an Exceptional Quarter Buoyed by Huge Deal Wins. Revenue Guidance Boosts Stock (Views On News)

Oct 14, 2021

Infosys raised its forecast for annual revenue growth to 16.5-17.5% from the earlier 14-16%, predicted in July 2021.

Info Edge: The Anatomy of an Indian Internet Behemoth (Views On News)

Oct 2, 2021

Info Edge is very popular in the Indian startup ecosystem due to its active participation in funding events.

This Indian Company is Tapping into the Huge Autonomous Driving Opportunity (Views On News)

Sep 14, 2021

Despite many challenges, Indian companies and startups have not shied away from entering this space.

More Views on News

Most Popular

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

This Multibagger Stock Zooms 20% After Dolly Khanna Buys Stake (Views On News)

Nov 24, 2021

Shares of this edible oil company zoomed over 50% in three days after ace investor bought around 1% stake.

6 Popular Stocks that Turned into Penny Stocks (Views On News)

Nov 27, 2021

A look at popular stocks that crashed big time and never recovered, i.e. which went from 'Multibaggers to Multibeggers'.

India's Top 5 Monopoly Stocks to Watch Out for (Views On News)

Nov 30, 2021

These 5 companies dominate their sectors with a huge piece of the pie.

5 Indian Companies Embracing Blockchain Technology (Views On News)

Nov 23, 2021

Blockchain adoption in India was slow in the past. Now, the technology is being well received.

More

Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

TRACK DIGITAL GLOBALSOFT

  • Track your investment in DIGITAL GLOBALSOFT with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
  • Add To MyStocks

MARKET STATS