so you missed Infosys, Wipro, Satyam and all the rest when they
were going cheap. Even if you didn't, rupee-multiplying investing
(as opposed to the boring incremental sort) is really about spying
the glitter of future success before everybody else does. So here
we are-with a set of five probables for tomorrow's tech stardom.
Infotech Enterprises, Blue Star Infotech, Geometric Software, KPIT
Cummins Infosystems and Mphasis BFL Ltd.
The selection criteria? These are firms, first
of all, that are in the tech domain, and thus sitting on increasing-returns-to-scale
and all the other wonders generic to the category. As the actual
filter gate, though, we have picked firms that have a technological
differentiator that gives them an edge in some market niche, and
a proven record in scaling up capacity rapidly to address global
The following five meet the test, and are potentially
high-growth firms that could outshine the rest over the years. Best
of all, they're going cheap-with mainly pre-teen P/E ratios. Check
Started in 1992, this software firm started
with a niche competence in geographical information systems (GIS).
The GIS business, however, has suffered the US slowdown, to which
the company has responded by ascending the value curve by offering
GIS consultancy internationally. Says Mohan Krishna Reddy, CFO,
Infotech Enterprises: "The pressure on margins was largely
because anticipated sales did not happen due to shrinking of the
GIS segment in the US. The billing rates as such haven't been affected."
For future growth, the firm is betting on domain
expertise-through its association with Pratt & Whitney-in Engineering
Design Services, particularly for automobiles, aerospace and engineering
machinery processes. This shift has been in evidence for some time
now. "From 70 per cent of sales coming from gis a couple of
years back," says Reddy, "we now have just 30 per cent
coming from that segment." Engineering services account for
30 per cent, and it services the rest.
Rahul Dhawan, Research Analyst, SKP Securities,
expects the firm to ramp up non-GIS capacity. "At the current
price the company does offer value," he says, "and has
the potential to fetch above average returns." Infotech Enterprises'
2005-06 revenue target: $100 million (Rs 460 crore). Jigar Shah,
Head of Research, K.R. Choksey Securities, is impressed with the
company's GIS value-additions, and is confident that the numbers
will start to flash brighter soon: "The rear end growth should
start happening in the second half of the current financial year."
Blue Star Infotech
Blue Star Infotech, part of the Rs 600-crore
Blue Star Group, is the smallest of the companies on the list in
terms of sales. The company is structured for big things, though.
It operates in North America, Europe and Southeast Asia, offering
software services. Its five main lines of business: Business Application
Practice, Global R&D, Banking, Financial Services & Insurance,
Consulting Services Practice and System Integration Practice. It
depends on Hewlett-Packard (hp), its predominant client, for more
than a third of its revenue, but has relationships with other global
clients too, many of them big names.
"Most of our deals are long term,"
boasts Sudhir Geera, Vice President (Marketing), Blue Star Infotech,
"so there is not much pressure on billing rates."
The company expects growth to come from its
niche areas of global R&D and consultative business services
(including onsite consulting, packaged solutions implementation
and support, and it outsourcing). Blue Star Infotech is also in
the midst of a conceptual recast that could position it more clearly
in customer mindspace. "We are looking at new geographies as
well as consciously changing our style from conservative offshore,
solutions-focused company into a consultative customer-centric company,"
adds Geera, proud of the orders just received from York International
Corp and Hitachi Medical Corp. As far as 'derisking' goes, the company's
hp dependence is projected to decline steadily, though perhaps not
the information-worthiness of the relationship.
Geometric Software, another intensely specialised
tech firm, is focused on product lifecycle management (PLM) services
to the global mechanical design, manufacturing and industrial markets.
The company claims special strength in complex PLM solutions for
automotive, aerospace and other such hi-tech industries, and boasts
of global associations with EDs and MatrixOne, apart from Dassault
Systemes, with which it has a 70:30 joint venture.
Recent years' revenues and profits have not
been all that 'geometric' so to speak. "The volumes didn't
come through," concedes Manu Parpia, MD, Geometric Software.
But there's no restraining the company's growth ambitions. The company
has geared its resources to move into high-growth mode, as Shah
of K.R. Choksey affirms.
Otherwise, the game is to ramp up PLM capacity,
while striking deals that offset the rupee appreciation factor.
Parpia agrees that overdependence on the plm sector alone poses
a risk, but explains that in this era of super-specialisation, "not
focusing on a niche too can be a big risk in itself". Another
concern is the dependence on just five top clients for 70 per cent
of sales. ''But then," says the CEO, "they are a regular
bunch and we have good relationships with them.''
While Geometric's business prospects look good,
the company continues to be seen as something of a 'one man army'
by many of its critics.
KPIT Cummins Infosystems
If software domain expertise is the game, KPIT
Cummins Infosystems-created by a merger of KPIT and Cummins Infosystems
last year-would like to bring together an intimate understanding
of banking and finance (from the former) and embedded software in
the manufacturing sector (from the latter).
This is also the only company on the list with
a market cap of under Rs 100 crore in late August. But that suits
the business model perfectly, since the emphasis is more on competence
establishment (the Cummins association obviously helps), before
the big numbers are sought. "We prefer to get deeper into our
niches that we specialise in," says Ravi Pandit, Chairman and
group CEO, KPIT Cummins Infosystems, "than diversify into other
areas for growth at this point in time."
The company provides end-to-end software development
and maintenance services through three development centres in Pune,
and global subsidiaries in the US, UK, UAE and Japan. According
to Jigar Shah of K.R Choksey, the advent of intelligent gizmos makes
embedded software a potentially vast field of opportunity. He adds,
''The company is not only into development but also into maintenance.''
Shah reckons that the company would maintain revenue growth of 30
per cent for the next three years-making it a good long-term bet.
Among the obvious risks: an appreciating rupee. "Tapping multiple
markets, tight cost control, and moving up the value chain are measures
we are taking to derisk ourselves from the appreciating rupee,"
Mphasis has been making waves for its BPO accent
in the recent times, but it has been an established player offering
solutions in software application integration, which involves making
legacy computer systems work with the new fangled stuff. Mphasis
concentrates on financial services, insurance, logistics and airlines
as its so-called verticals, and boasts of an impressive client list,
including CEO Jerry Rao's former employer, Citigroup.
While its profit margins are under pressure,
Ravi Ramu, Group CFO, Mphasis BFL, expects to "leverage the
expenses incurred on sg&a (selling, general and administration
expenses) over the next couple of quarters". Also, a volume
ramp-up ought to help, even as it hedges its forward dollar revenues
to mitigate the affect of a strengthening rupee (a trend unlikely
to be reversed soon, going by RBI's recent statements).
Msource, the BPO unit, distinguishes itself
for its Spanish facility in Mexico. "Msource has the early
mover advantage," says Surendra Goel, it analyst, Motilal Oswal
Securities, "The unit is also expected to turnaround in the
current financial year." Strategically, adds Chetan Shah, it
Analyst, Quantum Securities, "The company has to decide between
price and volumes." But the biggest challenge, according to
Ramu, "is to manage the anticipated growth".