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Kale consultants: Can it turnaround? - Views on News from Equitymaster
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  • Dec 14, 2000

    Kale consultants: Can it turnaround?

    The 1QFY01 results were quite disappointing for Kale consultants’ with its profits coming down by 80% due to increased employee costs. This was due to the fact that the company was getting infrastructure in place for the anticipated growth. 2QFY01 results were not very exciting either. Revenues grew by 34%. The profit recorded was Rs 4.4 m, which translates into a net profit margin of around 5%, which is lower than the margins in the pervious quarters.

    Exports accounted for 76% of the revenues. The company saw a significant rise in the services business and to streamline operations this division has been restructured into a strategic business unit.

    Presently, the focus of the group seems to be in the areas of banking and airline related software. The revenues from banking software group grew by 161% while from the airline group they grew by just 11% in 2QFY01.

    (Rs m) 1QFY01 2QFY01 Change
    Sales 68 91 33.8%
    Other Income 1 1 20.0%
    Expenditure 58 76 31.2%
    Operating Profit (EBDIT) 10 15  
    Operating Profit Margin (%) 15.0% 16.0%  
    Interest 0 3.9  
    Depreciation 7 7  
    Profit before Tax 4 4  
    Tax - -  
    Profit after Tax/(Loss) 4 4 8.7%
    Net profit margin (%) 5.9% 4.8%  
    No. of Shares (eoy) (m) 11 11  
    Diluted number of shares 11 11  
    Diluted Earnings per share* 1.5 1.6  

    Airlines is a very interesting segment for the simple reason that very few have players focus on this vertical. During 2QFY01, the company acquired software assets of Speedwing, an independent division of British Airways. This is a move to consolidate its position in the airlines business. Kale’s strength in this segment lies in software related to proration, which is revenue sharing between two or more airlines. The move has given Kale an entry into the European markets with and additional base of 20 clients. The deal was made for a sum of Rs 50 m. The revenues estimated are in the tune of Rs 500 m over a period of 3 years. Recently, the group bagged an order for a cargo management system in Africa. The transition is to end by December and the revenue impact can be seen thereafter. In this segment it will see competition from companies, which are not focused on any particular vertical. These companies specailise in delivering tailored solutions for clients and have low billing rates.

    The major concern is that the sector that is the driving growth for Kale, banking, is fiercely competitive. Competitors include majors like Infosys and Iflex also others who are showing strong growth in this sector are Polaris, PSI and Mphasis-BFL to name a few. Obviously the question is can it rely on banking for its growth rates? Even if it does there will be severe pressure on billing rates, consequently, adversely impacting the already low operating margins of the company.

    Looking at the historical growth rates, Kale has grown from Rs 77 m in FY96 to Rs 304 m in FY00, which comes to a compounded annual growth rate of 32% significantly lower than the industry rates. Kale consultants had been improving its operating margins every year till FY00 for which the margins were 38%. Kale has one of the highest employee costs in the industry, which is about 50% of its revenues. Currently the company is quoting at a P/E multiple of 90 times (based on 1HFY01 earnings annualised) considering its poor earnings the valuation is quite high.

    To sum up the company has shown average performance and definitely lacks a cutting edge that will help it to rise over competition, which will be fierce in the time to come. But most importantly all the verticals its focuses on have very low entry barrier. Therefore there is no reason other than demand that will drive growth. But that is a thing of the past, today companies are driven by innovation. Its time Kale woke up to the call.



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