Stock Review: Kale Consultants

The specialist software consultant, Kale Consultants, was on Thursday acquired by France-based Accelya. It had been attracting alot of attention in the stock markets of late. There was a buzz in the markets for the last few days that the company was up for sale.

The airline industry itself has been going through a lot of trouble. Hence, the ancillary industry has also suffered. However, over the past five years, Kale Consultants has posted revenue and net earnings growth of 24 per cent and 43 per cent, respectively. Even in the June quarter, operating income grew 31 per cent to `34 crore compared to `25.62 crore a year ago. The company has been able to maintain its earnings before interest, tax, depreciation and amortisation margins at around 24 per cent, better than most generic technology players in the market place.

Kale Consultants remains amarket leader in passenger revenue accounting (PRA) solutions, with industry-acclaimed products, the largest pool of expertise, the widest solution portfolio and the biggest customer base. Out of 20 airlines, 15 use Kale Consultants' solutions. It has three software development centres and four managed process outsourcing units. The company employs over 1,600 professionals who focus on delivering quality service to over 120 clients across 30 countries.

However, earnings are expected to stagnate and plateau, as growth in the airline industry will be restricted. There are plans to tap the logistics space, but they have not fructified as yet. Therefore, the market expected the company to strike an alliance or sell out the stake to a bigger player.

The current share price is around 11 times the FY11 earnings and so the company was a great target for acquisition. Institutions and traders have been eyeing the company for a long time.

French company Accelya buys the software consultant, but worries about the aviation sector may weigh on the stock

Stock Review: 3i Infotech

 

 

MUMBAI-BASED, mid-tier IT company 3i Infotech has underperformed on bourses over the past one year. Its stock fell by nearly 30% during the period compared to benchmark Sensex which gained 16%. The company had reported near-stagnation in its topline over the four quarters ended March 2010.

   Its June 2010 quarter performance raises hopes for a turnaround in the coming quarters. The company is once again witnessing traction in solutions for private equity, private wealth management products and e-commerce.

   During the June quarter, its consolidated topline grew by 7% to 637 crore on a year-onyear basis. The operating margin continued to remain flat mainly due to a one-time charge on account of the acquisition of the remaining 40% stake in FinEng Solutions.

   3i Infotech has adopted inorganic route to beef up its products portfolio. In 2008, it had acquired a domestic tax management portal, Taxsmile. It now boasts of over 2 lakh subscribers. The company further intends to acquire players in the travel, investment and consulting, healthcare and education sectors.

   In line with the broader IT sector, attrition remains a concern for 3i Infotech. Its IT services division recorded an attrition of 25% in the June quarter, much higher than 15-18% recorded by its bigger peers. Being a mid-tier player, the company may find it difficult to retain its talent pool without sacrificing profitability.

   3i Infotech has seen a steady rise in its order book over the past three quarters. It had outstanding orders worth 1,730 crore as of June 2010. New initiatives in the e-commerce and consumer related segments may trigger future growth. At the current market price of 61.3, the scrip is trading at nearly 9 times the earnings per share for the trailing 12 months. Given the growth opportunities in the existing and new business segments, the stock may report a turnaround in its performance in the next few quarters.

Stock Review: SmartLink Network System

 

 

SmartLink Network System is actually a memorandum of understanding (MoU) with D-Link, Taiwan. They got this space segregated between the Indian partners and foreign partners. If one looks at the core business of SmartLink, it has a good potential because the business they are into has got tremendous visibility going forward. If I see the entire aspect with 3G spectrum and WiMax coming in the following years and if one looks at the study conducted by BSRIA, the market size for the business can double or triple in less than 3 years. DIGILINK is the brand that SmartLink owns and is the second largest player into structured cable and other services. In India it's the largest player after AMP Tyco.

Looking at the entire aspect for this particular business, the company's market cap is just Rs 200 crore and the sales are going triple from five years perspective. The company is going to make that 10-12% of net profit margin. If one sees the periphery they are into, and see bigger players who are into forward basis, for example Hathway Cables and other players, they are roughly trading at 20-22 times PE multiple and this stock is not trading even at double-digit PE multiple if I adjust from the mutual fund liquid investment they are owning into the books.

Approximately, they own Rs 90 crore worth of liquid mutual funds and quality mutual funds like HDFC Top 200 etc. This was what was reflected last year. If I see the entire equity market momentum growth, this mutual fund could actually replicate the entire market cap of the company.

The promoters of the company have been aggressively acquiring the stake into the company from 62% previous two quarters the promoters have moved to 65%. We feel this stock has got tremendous potential looking into their partnership with foreign players like Singapore's number one memory-maker and other players and their recent announcement DIGISOL into the active networking products that we are banking on for the WiMax and 3G spectrum space, we think this has tremendous space going forward.

It would be difficult for us to assign actual target for the stock because once the stock gets into limelight and shows its performance, it will result into a profit momentum growth along with PE expansion. so even on a conservative side if I say that 13-14 times forward the stock would be somewhere around Rs 102 from a years perspective and given that this company will grow at approximately 20-25% way above its peers given that it has a bran which has got visibility and if someone has a patience for two years perspective, it will be at Rs 145.

The company pays a regular dividend and last year it paid Rs 2.5 dividend. Given all these things we feel there is limited downside and tremendous upside from current levels.