MEMBER'S LOGINX
| Login Failure | ||||||||
|
||||||||
| Sign Up | Forgot Password? | ||||||||
- Home
- Outlook Arena
- Oct 29, 2002 - Digital: Disappoints
Digital: Disappoints
Digital’s 2QFY03 numbers are significantly below expectations. The company has posted a 1% sequential decline in revenues. But the real disappointment is the net profit figure that has fallen 23% (QoQ). On a YoY basis, the topline is up 18%, while the net profits have fallen by 4%.
| (Rs m) | 1QFY03 | 2QFY03 | Change | 1HFY02 | 1HFY03 | Change |
| Sales | 961 | 949 | -1.3% | 1,510 | 1,910 | 26.4% |
| Other Income | 55 | 30 | -44.9% | 58 | 86 | 47.3% |
| Expenditure | 669 | 688 | 2.8% | 1,057 | 1,357 | 28.3% |
| Operating Profit (EBDIT) | 292 | 261 | -10.6% | 453 | 553 | 22.0% |
| Operating Profit Margin (%) | 30.4% | 27.5% | 30.0% | 28.9% | ||
| Interest | 0 | 1 | 0 | 1 | 125.0% | |
| Depreciation | 52 | 63 | 22.9% | 45 | 115 | 157.3% |
| Profit before Tax | 295 | 228 | -23.0% | 466 | 523 | 12.1% |
| Tax | 19 | 14 | -27.7% | 51 | 33 | -35.9% |
| Profit after Tax/(Loss) | 276 | 214 | -22.7% | 415 | 490 | 18.1% |
| Net profit margin (%) | 28.8% | 22.5% | 27.5% | 25.6% | ||
| No. of Shares (eoy) (m) | 32.7 | 32.7 | 32.7 | 32.7 | ||
| Diluted Earnings per share* | 33.8 | 26.1 | 25.4 | 29.9 | ||
| P/E (x) | 18.0 | 15.70 | ||||
| *(annualised) |
While a sharp fall in other income is largely responsible for the decline in net profits, a steep dip in other income is also equally responsible. The operating margins have fallen due to a sequential rise of 6% in employee costs. However, the company did manage to control costs. The ‘other’ expenses declined by 9.5% sequentially.
The reason for the weak performance is the slowdown in revenues from its parent, the new HP, which accounted for 81% of revenues in 2QFY03. The growth in revenues from its parent has been slowing down for quite sometime now. In 1QFY03, the sequential growth in revenues from the parent was a small 1%. However in 2QFY03, there has been a sequential decline in revenues. Last quarter the company had indicated that the lower growth in revenues from the parent was due to the fact that ‘things are in a state of flux as the parent is sorting out merger related issues’. This seems to be the reason for the decline in revenues in 2QFY03 also. According to the company, due to the HP-Compaq merger, both new deals and renewals were delayed.
| (Rs m) | 1QFY03 | 2QFY03 | Change | ||
| HP | 711 | 74.0% | 689 | 72.6% | -3.1% |
| HP external | 83 | 8.6% | 80 | 8.4% | -3.6% |
| Total HP related | 794 | 82.6% | 769 | 81.0% | -3.1% |
| Non-HP | 167 | 17.4% | 180 | 19.0% | 7.8% |
| Total revenues | 961 | 100.0% | 949 | 100.0% | -1.2% |
However, the growth in revenues from non-HP clients was strong. The company added 21 (28 in 1QFY03) customers for its services business. Thus, the performance of the company has been disappointing due to events that could be temporary in nature. Once the merger related issues are sorted out things could begin to look up for Digital.
| Service offerings | 1QFY03 | 2QFY03 | |||
| Rs m | % of revenues | Rs m | % of revenues | Change | |
| eApplications | 379 | 39.4% | 394 | 41.5% | 4.0% |
| Systems Engineering | 185 | 19.3% | 180 | 19.0% | -2.7% |
| Enterprise Solutions | 242 | 25.2% | 217 | 22.9% | -10.3% |
| eInfrastructure | 104 | 10.8% | 104 | 11.0% | 0.0% |
| Telecom | 23 | 2.4% | 27 | 2.8% | 17.4% |
| ATG & TSCC* | 8 | 0.8% | 16 | 1.7% | 100.0% |
| Products | 20 | 2.1% | 11 | 1.2% | -45.0% |
| Total | 961 | 100.0% | 949 | 100.0% | -1.2% |
The decline in revenues from the Systems Engineering could be due to rationalization of platform and technologies at the parent end. Digital traditionally has expertise in Compaq’s technologies. As the parent now consolidates these technologies and completes integration, Digital will have re-align its skill sets to the technologies that will stay. Thus, it could be sometime before revenues from this area show growth. The decline in revenues from the enterprise solutions service offering did most of the damage. However, the lower business was more of a result of the delay in getting new projects as compared to a skill set mismatch. Infact, other IT services firms have shown the strongest growth in this service offering.
At the current market price of Rs 470, the stock is trading at a P/E multiple of 16x its FY03 estimated earnings. In its communication, the company has repeatedly indicated that the parent sees the value in outsourcing to Digital and it’s a question of time before projects start flowing in. Thus, the company expects that 2HFY03 will be stronger than the first half. However, the uncertainty regarding the new parent’s plans for the company and uncertainty over the impact of the merger remains. This is likely to continue haunting valuations in the near future. While the valuations are on the lower side and seem attractive, the element of risk is considerable.
More Views on News
Sorry! There are no related views on news for this company/sector.
Most Popular
It's the Beginning of a New Bull Phase in Smallcaps (Profit Hunter)
Feb 24, 2021Last time the smallcap index crossed 19k a big correction followed. Here's what makes it different this time.
Intraday Trading for a Living (Fast Profits Daily)
Feb 15, 2021In this video, I'll cover your queries on intraday trading and also share my view on how to decide stop losses and target prices.
Top 5 Stocks Mutual Funds Bought and Sold in January 2021 (Sector Info)
Feb 16, 2021A look at what India's top equity mutual funds bought and sold in January 2021.
I Would Recommend this Small-cap Stock Over Tesla (Profit Hunter)
Feb 16, 2021Do you enjoy reading Tesla and Bitcoin stories? Here's a not so famous small-cap stock to profit from the rise of EVs.
MoreOUR TOP 5 IDEAS
- Access Now: Eight Steps to Your Eight Figure Fortune
- Are You Making One of These 15 Costly Mistakes While Investing. Learn more!
- Covid-19 Proof Multibagger Stocks - Download this FREE Report Now
- Free Report: The Secret to Increasing Your Trading Profits Daily!
- No Guessing, No Hunches, and No Missed Trends Ever! Join Us on YouTube Now.
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
ABOUT EQUITYMASTER
Since 1996, Equitymaster has been the source for honest and credible opinions on investing in India. With solid research and in-depth analysis Equitymaster is dedicated towards making its readers- smarter, more confident and richer every day. Here's why hundreds of thousands of readers spread across more than 70 countries Trust Equitymaster.
FREE NEWSLETTERS
PREMIUM PRODUCTS
QUICK LINKS
POPULAR TOPICS
- Basics of Value Investing
- Benjamin Graham
- How to Invest in Gold
- How to Invest in Silver
- Best Stocks to Buy Today
- Warren Buffett - The Value Investor
- The Best Small-cap Stocks to Buy
- The Best Bluechip Stocks to Buy
- Your Ultimate Guide to Penny Stock Investing
- 10 Rules for Successful Long-Term Investing
- How to Invest in the Share Market
- Momentum Moves
FOLLOW
APP
Copyright © Equitymaster Agora Research Private Limited.
Whitelist | Refer | Terms | Privacy | Contact | About | Sitemap
Equitymaster Agora Research Private Limited (Research Analyst) 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
All rights reserved. Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.
LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA, Canada or the European Union countries, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.
SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster requests your view! Post a comment on "Digital: Disappoints". Click here!
Comments are moderated by Equitymaster, in accordance with the Terms of Use, and may not appear
on this article until they have been reviewed and deemed appropriate for posting.
In the meantime, you may want to share this article with your friends!