Digital: Disappoints - Views on News from Equitymaster

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

  • MyStocks


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

Digital: Disappoints

Oct 29, 2002

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  

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%
*ATG- Advanced Technology Group *TSCC- Technical Support Contact Centre

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.

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


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, 2021

Last 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, 2021

In 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, 2021

A 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, 2021

Do you enjoy reading Tesla and Bitcoin stories? Here's a not so famous small-cap stock to profit from the rise of EVs.


India's #1 Trader
Reveals His Secrets

Secret To Increasing Your Trading Profits Today
Get this Special Report,
The Secret to Increasing Your Trading Profits Today, Now!
We will never sell or rent your email id.
Please read our Terms


  • 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