Digital recently acquired a document management product from Compaq. This acquisition of ‘Compaq Archive’ was for a consideration of US$ 2.5 m (Rs 120 m). The product is an electronic information lifecycle management solution for managing storage and retrieval of critical information.
This move will benefit the company in terms of increased revenues and better operating margins. However, the benefits of this move, on the financials, will be felt only in 1QFY03. Digital has acquired an existing product and now will invest in enhancing the existing product. The company will also provide services to integrate the products with the customers existing systems (like SAP R/3) in place. The other groupware the software can be integrated with are Microsoft Exchange, Lotus Domino and Documentum.
One of the dreams that information technology is yet to fulfill is that of a paperless office. However, the change is gradually taking place. As employees get more and more comfortable with computers, documents are getting increasingly digital in nature.
The opportunity for software companies like Digital lies in the fact that few corporates have a central system to manage to the large numbers documents being created daily. Generally, the individual who creates these documents manages the storage and therefore, the organisation is known only to the individual and not standardized. If the person leaves, more often than not, others are at a loss to figure out how the documents have been organised and consequently, retrieval of critical information becomes cumbersome. Also, there are other issues like security and restricted access to documents, which need to be looked into.
Thus, the imperative is that the documents (knowledge) being generated are to be captured and stored in a manner that is standard across an organisation. The benefits are that the information is stored securely and can be retrieved as and when required. Though this sounds kind of mundane, but the costs for not maintaining information properly can be very high. According to an IDC report, Fortune 500 companies could lose upto a staggering US$ 32 bn (Rs 1,440 bn) in 2003 due to inefficient knowledge management systems. This would be more than the size of the Indian IT industry put together.
Therefore, as organisations get more human resource or intellectual capital intensive, the demand for knowledge management services and products will see an increase. According to IDC, the markets for document and content management solutions is projected to grow at a CAGR of 32% from 2000 to 2004. The significant growth opportunity that the segment offers could have caused Digital to enter into the business.
With this move the company has added another service offering to its list and since it has acquired an existing product it will also get an access to the captive customer base of the product, which is about 150 companies. The list includes ABB, Black & Decker, Lego, BMW, Pennzoil, Samsung, Larsen & Toubro, Mahindra & Mahindra, Ranbaxy and Compaq.
The company is effectively utilizing its cash reserves which was around US$ 25 m (Rs 1,200 m). Digital has taken to acquiring products as a route to for growth. Digital has made a similar move earlier when it acquired Compaq’s EDI (Electronic Data Interchange) product. Both the products that Digital now offers are comprehensive in nature and are critical to an organisation’s operation. More importantly these products are established and have a strong client base. Digital could be assured of a certain amount of visibility in revenues from the products on account of the need for maintenance and upgrades. The increased contribution to revenues from products would diversify the market risk that the company faces to a certain extent.
At the current market price of Rs 391, the stock is trading at a P/E multiple of 18 times is FY02 estimated earnings. The company’s earnings are expected to grow at a CGAR of 35% over the next three years. Therefore, the stock could see upside to its valuations in the future.