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Digital India - Growing step by step

Nov 8, 2000

With a net profit growth of 132% over the first quarter, Digital seems to be making the right kind of moves. Of its total revenues, 89 % were accounted for by Compaq, which holds a 51 % stake in the company. The major growth driver for Digital has been e-infrastructure management and telecom, which accounted for 18 % and 4 % of the revenues respectively.

(Rs m) 1QFY01 2QFY01 Change
Sales 286 405 41.4%
Other Income 40 29 -28.3%
Expenditure 239 303 26.8%
Operating Profit (EBDIT) 47 101 115.7%
Operating Profit Margin (%) 16.4% 25.1%  
Interest - -  
Depreciation 15 13 -17.6%
Profit before Tax 72 117 64.0%
Tax 14 (17)  
Profit after Tax/(Loss) 58 134 132.2%
Net profit margin (%) 20.2% 33.2%  
Diluted number of shares 32.7 32.7  
Diluted Earnings per share* 7.1 16.4  
*(annualised)      

For Digital, the focus in the telecom sector is on wireless applications. Very recently an operations solutions center for telecom carriers on Nortel PRESIDE platform was inaugurated at Banglore. Another area of focus is managed services. Considering the nature of technology involved in the telecom sector, a focused approach does make a lot of sense. In India very few companies, like Hughes Software and Wipro, have this kind of a focus. Telecom excluding, the Digital Mantra is “Selling Vertically, Delivering Horizontally”.

With its core competence in the area of technical maintenance and support, Digital has been moving up the software value chain and has been developing capabilities in the area of technical enhancements and engineering. The Company is looking for alliances in the areas of IT and business strategy because of entry barriers in the area, primarily knowledge and branding.

While the company is moving in the right direction, there are a few concerns.

Digital earns only 11% revenues from non-Compaq customers. The year-end target for this was 25%. This means that its non-Compaq revenues have to grow at a pace of 40% for the second half year, which is a tough target to meet.

Another issue that is facing the company is its onsite / offshore revenue mix. The billing rates for onsite projects are almost twice that of offshore projects. Shifting projects offshore would reduce the billing rate and therefore the profitability. Currently the onsite / offshore mix is around 65 – 35. The company is targeting a more even mix, 50 – 50.

Compaq has a policy of giving the job to the best vendor, which may not necessarily be Digital. So unless it has a standing of its own this is likely to be the key concern. The only relief in this area is that demand is far greater than supply in the areas in which Digital operates.

Overall the outlook on the company is positive. Agreed it is not at the very top end of the software value chain but then everyone needs to make a start somewhere?

Perhaps Digital is following the very Indian IT capability maturity model, take up low-end job (like Y2K), prove that you are good, establish an image of reliability and capability, and slowly move up the value chain. Infrastructure management though at the lower end of the value chain is no doubt very critical.

The strongest point for the organisation is the quality of its management. The management is clear as to where it wants to go and how to get there. With the kind of vision the management has, all that the organisation needs, is a sincere effort, which has come to be the hallmark of the Indian IT industry.

Currently Digital’s valuation is in line with that of Hughes and NIIT. These valuations are way below the other front liners like Wipro and Infosys. The high valuations reflect the brand value Infosys and Wipro have created for themselves. This is one call that Digital has to answer immediately to be recognized as a reliable and able solutions provider.

Comparative Valuations
Particulars Wipro Infosys Hughes
Software
Digital NIIT
Market Price 2328.7 7697.2 1079.6 502.5 1645.4
P/E(x) 86.5 82.6 34.2 30.6 28.3

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