Telco: An upside to valuations? - Views on News from Equitymaster

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Telco: An upside to valuations?

Oct 12, 2000

Tata Engineering and Locomotive Company Ltd (Telco)'s 100% subsidiary Tata Technologies (TT) has announced that it will be expanding its scope of operations in the software services sector. The company is currently a leading player in engineering automation building(CAD/CAM/CAE) areas. It also provides services in other areas like e-business, Enterprise Resource Planning (ERP), Product Data Management (PDM), however not is such a big way as engineering automation. Since it started its operations the company has developed many international as well as domestic clients. Its major clients are currently from the automobile segment. Some of its clients are General Motors, DaimlerChrysler, Delphi, Boeing, Ford, Fiat, Rolls Royce, Oracle, Tata Engineering, TELCON, Bajaj Auto, Lucas TV, Sonar Steering and VSNL.

As part of its expansion plans the company is setting up a state-of-the-art software resource centre at the Software Technology Park at Hinjawadi (Pune). It plans to employ around 1,000 IT professionals for this. It will focus on three areas: Application Service Provider, Engineering Automation and Enterprise solutions.

As the company is now looking towards expanding its software services and client base this will have a positive impact on the company's bottomline. As the software sector is growing very rapidly the company is all set to take advantage of this.

This is also positive for Telco, whose valuations have languished in the past year. Its main business of commercial vehicle and passenger cars are both seeing a slowdown in the current financial year.

A successful venture into the high growth software services sector could provide a trigger to the Telco's share price, which has been languishing in recent months. TT has reported a net profit of Rs 38.5 m and the EPS works out to Rs 18.3 for FY2000. If this company was to go public in future, taking a conservative 20x P/E ratio, the share price is likely to work out to over Rs 350 per share, giving it a valuation of Rs 735 m or Rs 2.9 per share of Telco. As TT's business is expected to grow, it is likely that this figure would be higher over the next few years.

On the current price of Rs 78, Telco is trading at 27.8x FY2000 EPS of Rs 2.8. It is trading close to its 52 week low.

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