Glodyne Technoserve

AMONG the few companies which have maintained its growth momentum in the ongoing economic slowdown is Glodyne Technoserve. It has a presence in infrastructure management services (IMS) and domestic e-governance projects. The company is expected to benefit significantly from the rural development initiatives of the central government. Medium-term Investors can add this stock to their portfolio.
Business:

Glodyne currently derives around three-fourths of its revenue from IMS and the rest from software services, mainly projects related to egovernance. Both these business segments have remained relatively insulated from the slowdown. Infrastructure management is an operational expense for its customers and is non-discretionary in nature. Rather, it lowers the operating expenses of its clients significantly. The company is trying to manage an increasing amount of IMS activities from remote locations, thereby improving the operating margin. In e-governance, the company is focussed on the domestic market. It has bagged a contract (called e-Shakti project) from the government of Bihar which will help monitor National Rural Employment Guarantee Scheme projects in that state. The contract initially, estimated at around Rs 285 crore, is expected to go up to Rs 500 crore due to the increased scope of the contract.

Financials:

The company’s net sales have been growing at a compounded annual rate of around 80% for past four years. It managed to report around 70% growth in net sales for the financial year ended March 2009. More off-shoring of its IMS business has improved the overall operating margin by around 300 basis points to 21%. As a result, the net profit for the FY ’09, continuing the previous trend, almost doubled to Rs 78 crore. The company’s net debt has more than doubled to Rs 85 crore. But its interest coverage ratio is still at a comfortable level of more than 13.

Growth driver:

The new government at centre is bullish on rural development and plans to spend more on different rural development schemes. It has increased allocation to NREGS and other such schemes in its recent budget. The company, being a first mover, is going to benefit from this. It is already working with many state governments on some pilot projects and if everything goes smoothly it is likely to bag big-ticket orders from them. Its recent acquisition of Broadllyne Technologies shows its continuous focus on the domestic market. The acquisition is an all-stock deal and would not affect the company’s cash flow. The company is also looking at small overseas companies mainly to increase its client base.

Valuation:

Though the company has maintained more than 80% growth in topline, we believe that it may not be able to continue this in the coming years. The company’s topline is expected to grow at 40% next year and its operating margin will be maintained. The new acquisition is also expected to add around Rs 8-10 crore to the bottomline. The company’s diluted earning per share (EPS), after adjusting for issue of a total 15 lakh of equity shares and convertible debentures, is calculated as Rs 90 for FY ’10. At the current price level, the forward price-earning (P/E) multiple works to be around 5. The stock has traditionally traded at a P/E band of 7-12. Hence we believe that there is a strong upside potential in the next 1-2 years. Investors with a medium term horizon can consider buying this stock.

Beta 0.9
Institutional holding 0.02%
Dividend Yield 0.25%
P/E 7.1
M-Cap Rs 520 cr