Tata Infotech: Poor YoY numbers - Views on News from Equitymaster

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Tata Infotech: Poor YoY numbers

Dec 4, 2002

Tata Infotech has reported better quarterly results for 2QFY03 compared to 1QFY03. The company reported a nearly 8% growth in its topline while its bottomline has registered a net profit of Rs 43 m on a QoQ basis. On a YoY basis the picture is a bit grim. Topline has fallen 23% while bottomline has fallen by 74%.

(Rs m)1QFY032QFY03Change1HFY021HFY03Change
Net Sales 958 1,030 7.5% 2,579 1,988 -22.9%
Other Income 21 19 -7.6% 37 41 9.5%
Expenditure 986 998 1.3% 2,403 1,984 -17.4%
Operating Profit (EBDIT) (28) 32 - 175 4 -97.9%
Operating Profit Margin (%)-2.9%3.1%6.8%0.2%
Interest 4 2 -43.0% 8 6 -25.0%
Depreciation 36 34 -3.4% 82 70 -14.4%
Profit before Tax-4615 - 123-32 -
Tax (35) (26) -24.1% 9 (62) -
Profit after Tax/(Loss) (11) 41 114 30 -73.7%
No. of Shares (m) 18.4 18.4 18.4 18.4
Diluted Earnings per share*-2.58.912.33.2
P/E (at current price) 22 61
(* annualised)

The main highlight of the company's performance has been the performance of its IT education division which has grown by 39% QoQ. Tata Infotech is aggressively targeting the corporate learning segment. Also it is in the process of tying up with state governments' to provide IT education to state schools. New initiatives like training programs in the areas of ISO 9000, software testing and six sigma have also helped the company achieve this robust growth. With a pick up in the IT hiring by major Indian software companies, the IT education division of the company is likely to see better times ahead.

(Rs m)1QFY03% Contribution2QFY03% ContributionChange
Systems integration 820 85.3% 876 84.3%6.9%
Manufacturing 97 10.1% 102 9.8%5.2%
Education 44 4.6% 62 5.9%39.2%
Total 961 100.0% 1,040 100.0%8.2%

The company's manufacturing division, which provides contract manufacturing services to its clients for electro-mechanical devices has reported lacklustre growth in the September quarter. In FY02, this division reported a robust growth of 46%. The current performance indicates lacklustre demand for new technologies like embedded systems and Linux based hardware in which the company has slowly increased its presence. On a quarterly basis, the company has reported a 7% growth in its main business of systems integration. The systems integration division of the company is facing pressure as the IT spending by corporates is getting concentrated on maintaining and developing existing software systems instead of incurring expenditure on new systems.

On the operational front, the company has done well to limit its operating expenses. The company has been able to reduce costs incurred on raw materials and other expenses. Improvement at the operational level has helped operating margins improve to 3% from a negative level last quarter. Tata Infotech has also done well to reduce its interest costs. Low interest rates have helped the company pare down its debt burden.

The stock is currently trading at Rs 196 at a P/E multiple of 61x its annualised 1HFY03 earnings. Though the company has reported impressive numbers in the IT training division, the contribution of this division to the overall revenues is very less (6%). Therefore, the impact on the topline has been minimal. Also, on a YoY basis, the company's topline performance has been disappointing. The recent improvement in valuations is likely to be short term in nature, as the core business of the company i.e. systems integration would continue to suffer from depressed IT spending.

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