Virtual dealer

PENNY WISE

Considering its fast growing niche products business, Logix Microsystems appears inexpensive at the current level.

Among the very few tech companies that survived the dotcom bust and the slowdown after 9/11 is Bangalore-based Logix Microsystems. The company transcended from being an enterprise service provider in the beginning of the millennium to carve a niche for itself in the product space, that too, in the challenging North American market.

In 2002, the company launches its innovative product targeted at auto-dealers and ever since, it has been growing consistently. Now, its business is reaching an inflection point from where growth can be enormous.

A unique niche
Logix makes web-based automotive marketing software products under the brand izmocars for automotive dealers in the US. These products are online tools which help dealers attract customers by giving them a feel of the various models online.

Logix provides a database of images and animations of the automobile models available in the US which helps the prospective buyer pick and choose the features and specifications in a vehicle. Logix provides these animations within just 10-15 days after a model is launched in the American market.

The automotive dealers which subscribe to this database are entitled to feature these animations on their websites in order to help their prospects navigate through the vehicle. This provides the prospect an online experience or "a tour" of the vehicle that one wants to buy. One can also compare the vehicle with other competing models.

Logix boasts of the largest database of automotive animations in the world. At present, its library amounts to a resource investment of nearly 500,000 man hours. While it takes about 400 man hours to create a tour of one automobile, the company models nearly 400 cars every year.

Logix has a three per cent market share in the 27,000 dealer strong US automotive market, with over 700 dealers among its clientele. The company has two prominent competitors -- The Cobalt Group (9,000 clients) and Reynolds (5,000 clients) -- which currently dominate the American online automotive marketing industry.

Cobalt, its competitor, is also its client, as it sources the automotive animation database from the company because it is difficult to replicate the database of automotive images that Logix has.

Apart from its automotive marketing products, Logix provides online marketing tools, hybrid internet sales systems, enterprise connectivity solutions, custom software, sound and animation and kiosk development services.

Logix has a diverse client base, spread across geographies which include big names such as ABB, AT&T, Citicorp, Ford Motor, General Motors, IBM, Infosys, Mitsubishi Motors, Samsung, Shell Petrochemicals, Sony, Wipro and Yahoo! Autos among others.

Few fish, big pond
The North American automotive retail market is estimated at $ 1.7 trillion with over 27,000 new car dealerships, twice as many used car dealerships and nearly 40 automobile manufacturers with a score of models on offer from each one of them. Over 20 million vehicles are sold annually in the US. Logix as also its competitors are growing leaps and bounds.

"An online tour of an automobile is an integral part of the buying process," says Sanjay Soni, managing director, Logix Microsystems. "More than 80 per cent new car buyers search online before stepping into a dealership," he adds. This makes it essential for automotive retailers to have an effective online presence.

Logix is in a strong position especially as it supplies its database to one of its rivals, and has around 96 per cent of its revenues coming from its existing customer base. Further, it invests nearly 15 per cent of its revenues in R&D every year in order to come up with new and innovative products continually.

For instance, after launching its izmocars platform for online retail of automobiles, it launched an online marketing tool under the brand izmoRainmaker which helps its clients convert online leads into prospects more effectively. izmoRainmaker achieves higher realisations for Logix from its clients as compared to its other products.

Valuation
The Logix stock has been hammered badly as IT stocks plummeted over concerns of a rising rupee and the company's concentration in the US. However, the company incurs a significant portion of its costs in the US itself since it has its studio for modelling automobiles in the US.

Also, the company's other business divisions have a clientele spread across the globe, which helps it diversify its currency exposure. To strengthen its presence in the US, the company acquired Carsite.com in February 2007.

Financially, the company has been gaining momentum. Over the past few years, its topline has grown by over 50 per cent. Its operating and net profit margins have also expanded. 

SMALL WONDER
Rs crore	FY06	FY07	FY08E
Revenue	19.70	31.20	54.00
Operating profit	7.20	13.20	26.00
OPM (%)	36.50	42.30	48.10
Net profit	3.20	10.30	20.00
NPM (%)	16.20	33.00	37.00
EPS (Rs)	4.80	10.60	21.70
P/E (x)	-	24.10	11.80

Revenue contribution from its products has grown considerably over the years, and the segment now contributes more than 85 per cent to the topline. This again has been one of the reasons for better margins.

Logix cannot be compared directly with any other technology companies in the listed space and none has an identical business model. However, when stacked up against the IT industry, the stock appears valued at a significant discount to its peers at 11.8 times its estimated FY08 earnings.

From its ride downhill since October, the stock has been inching upward to touch Rs 255, over the past couple of months from as low as Rs 185. A large target market, rapidly growing client base, improving profitability and its potential of launching new products makes Logix an attractive investment.