Search the Internet           Tips

Higher margins, onsite revenues propel Digital's growth

NetScibes/Ganesh Ramamoorthy

A sequential growth in operating margins and increased contribution from onsite projects have helped Digital Equipment India Ltd post a solid 188 per cent growth in net profit for the quarter ended December 31, 2000. Analysts had earlier estimated a 125-135 per cent growth.

For December quarter, Digital posted total revenues of Rs 561.5 million, up 144.55 per cent from Rs 211.1 million a year back. On a quarter-on-quarter basis, total revenues grew 30 per cent and net profit 24 per cent, compared to the industry average of 10 and 12 per cent, respectively.

"Digital's revenues have been growing sequentially at about 30 per cent on a fast growing base due to a rise in software revenues," said Nayan Mehta, analyst at Emkay Shares and Stockbrokers. "This indicates that the company is able to sustain its growth after showing improved performance in the last two quarters."

Analysts say the results are very encouraging although revenues from Compaq still account for about 87 per cent of total revenues. A 66 per cent, quarter-on-quarter growth in non-Compaq business is a positive signal and would help mitigate the risk faster, they add. Digital sold off its hardware business to Compaq in June 1999 and it has been consolidating its software business since then.

Unlike other software services companies, Digital's revenues come mainly from onsite projects. Analysts attribute this quarter's revenue growth largely to a 35 per cent jump in onsite project revenues to around 68 per cent of total revenues. Revenues from offshore projects grew 20 per cent to 32 per cent of total revenues.

"Margins in onsite projects are very low. Digital seems to be trying to get a foot in the door with onsite jobs before shifting to offshore. While it's a good strategy, a lot will depend on client relationships," said an analyst at Asit C Mehta Brokerage.

Operating profit margins for the quarter rose to 38 per cent from 36.19 per cent a year back, while net profit margins grew to 31.5 per cent from 27.23 per cent in the year-ago period, 25 per cent in Q2 2001 and 15 per cent in Q1 2001.

According to analysts, margins could come under pressure once Digital starts spending more to reduce the risk of client concentration by targeting non-Compaq clients. "This would need heavy marketing expenditure, which is not part of its expenses yet. Digital has some big non-Compaq clients - NEC, Sony and Nortel. But that list is still too small," the analyst said.

While short-term triggers to the scrip are expected when Digital announces non-Compaq clients, analysts expect profit-booking in the counter during the week as the scrip had risen sharply prior to the results announcement.

"Digital is a good stock for anybody considering a look at second-rung software companies. But one must also remember now that expectations from the March quarter are very high. It is not to say that the March results are going to be bad, but just that investors could play safe against high expectations," said Mehta.

On Tuesday, the Digital scrip closed at Rs 632.80, up marginally from Rs 630.85, with volumes of over 2.77 million shares on the Bombay Stock Exchange. At its current market price, the scrip is trading at about 41 times its annualised earnings per share of Rs 15.

Money

Market Impact

Tell us what you think of this report