Analysts seem positive about the scrip after two developments - the company's positive future outlook for the merged entity and diminishing concerns over billing rate declines.
In fact, the scrip had plunged 23% in the previous week after the market expressed disdain over the scheme of merger of HP's 100% Indian subsidiary HP Services' India Software Organisation (HPS ISO) with Digital (announced on 6 June 2003). Digital's stock had moved in a band of Rs 500-600 over the last few months amid alternate bouts of buying and selling .
But last week it showed sudden strength after the company provided a positive future outlook for the merged entity , saying that the combined entity would achieve earnings growth in FY 2004-05 (the first full year of combined operations). After trading hours on Tuesday, Digital announced its operating outlook for the combined entity, on the initiative to establish the company as a consolidated focal point for HP services global delivery capabilities in India and as a preferred vendor.
Digital said it is likely to report higher EPS from FY 2003-04 onwards, compared with Rs 31.90 reported for FY 2002-03. Further the transaction is expected to be EPS accretive in FY 2004-05, the first full year of combined operations. The management said it is focussed on maintaining a growth trajectory and achieving accelerated performance including achieving revenues of over Rs 1,200 corre in FY 2004-05 and Rs 2050 crore in FY 2006-07.
To add to the scrip's upbeat trend, the management said that while there could be billing rate cuts from HP, the rate cut would be in line with market conditions. The management clarified that Digital has already witnessed rate reductions over the last three quarters of FY 2002-03 and future reductions would be based on developments in the industry.
Earlier, analysts expressed concern that there could be drastic billing rate cuts by HP, the main customer, post merger. `There has been widespread concern that the merged entity would
As per the merger scheme, Digital will combine with HPS ISO in the next 6-12 months. HPS ISO is a 100% subsidiary of Hewlett-Packard Company (HP), its parent company and its majority shareholder. Digital will initially issue to HP 27.80 million new equity shares, which would increase Digital's equity share capital to Rs 60.8 crore from Rs 33 crore and HP's equity stake in Digital will initially increase to 73.2% from 50.6% currently. Digital will also issue 7.67 million of 1% convertible preference shares of Rs 10 each convertible into one equity share of Rs 10 each in 18 months from the date of allotment. Digital GlobalSoft would have preferred vendor status with HP post-merger.
On a sequential (compared to December 2002 quarter) basis, Digital registered a 10% rise in revenues to Rs 121.47 crore for the quarter ended 31 March 2003. OPM fell heavily from 31.0% to 27.1%. As a result, OP slipped by 4% to Rs 32.90 crore. Other income rose 72% to Rs 5.67 crore and interest cost was the same at Rs 7 lakh. A 20% fall in depreciation (to Rs 5.61 crore) cost saw its PBT rise by 8% to Rs 30.36 crore. A 15% fall in taxation to Rs 2.85 crore ensured a 11% jump in net profit to Rs 30.04 crore.
On a y-o-y basis, sales were higher by 30% but OPM has fallen from 32.5% to 27.1%, thus restricting the OP growth to just 8%. An 8% rise in other income, 40% rise in taxation and a 24% fall in depreciation saw PBT growing by 16%. After providing 60% higher taxation, PAT grew by 13%.
For the year ended 31 March 2003, sales grew 27% to Rs 422.42 crore. However, a lower OPM of 29.3% (against 32.0%) saw its OP rising by just 17% to Rs 123.97 crore. A 29% rise in other income (to Rs 17.52 crore) and 77% rise in interest cost (to Rs 23 lakh) saw its PBDT rise by 18% to Rs 141.26 crore. As depreciation rose 64% to Rs 25.75 crore and taxation fell 15% to Rs 9.49 crore, PAT rose 14% to Rs 106.02 crore.
