iGATE: Hard drive

iGATE will have to work hard and improve margins

iGATE Global Solutions, the first software company to announce its results for Q4 FY06, has not had a great quarter.

The company posted a 1.35 per cent increase in operating revenues, and some of it is owing to the company's consolidation efforts to exit from non-strategic accounts.

iGATE also faced higher employee costs owing to a partial salary revision and other costs such as infrastructure, which led to its earnings before interest, tax and depreciation (EBITDA) falling 18.16 per cent q-o-q. Operating margin too fell 230 basis points to 9.63 per cent in the quarter.

Offshore billing rates at $19.1 a hour and onsite billing rate at $60.7 were the same as in Q3 FY06. The contribution of offshore efforts to total volumes increased by 200 basis points to 73 per cent.

From these levels, it will be difficult to increase offshoring further. Revenues from its top customer, GE, increased by 10.6 per cent over the previous year. Revenues from GE have reduced to 36 per cent of total revenues in FY06 from 40 per cent last year.

The management said that iGATE had to refuse business during the quarter as it did not have enough people to deliver the projects.

This is a serious concern for a mid-sized IT services company as the larger companies will absorb a significant portion of the available talent.

Thus far, iGATE has capped the recruitment of trainees at 30 per cent, which it will now increase. Besides, it has an attrition rate of over 19 per cent, which is quite high.

At the profitability level, iGATE is far from consistent with an up and a down year in the past four years.

Going forward, the management says the company's offshore model is working well with existing clients ramping up their outsourcing and new client acquisition is strong, along with higher billings. IGS will have to work hard and improve margins to justify its trailing 12-month P/E of 141.

Pantaloon: Retail binge

Pantaloon Retail has reported a 22.6 per cent y-o-y growth in its same-store value retailing business to Rs 66.86 crore in March 2006, while its higher margin lifestyle segment grew merely 5.63 per cent to Rs 32.11 crore.

In contrast, between July 2005 and February 2006, Pantaloon's lifestyle segment same-store sales expanded 20.23 per cent y-o-y, while value retailing segment grew 28.31 per cent.

Analysts say that Pantaloon had been ramping up sales in earlier months via special promotions and consumers may have adopted a wait and watch attitude, especially, for the lifestyle segment in March 2006.

It is understood that within the company's value retailing business in March 2006, the share of low-margin food business has once again showing signs of growing at a faster pace.

Meanwhile, analysts forecast the company to show a sales growth of 80 per cent to Rs 500 crore in the March 2006 quarter and that's largely owing to promotions such as sale in the first quarter and 'Maha Savings Day' in January 2006, say analysts.

However, higher growth in the company's lower margin value retailing business is expected to result in its operating margins slipping about 100-110 basis points y-o-y to 7.7 per cent in the last quarter, say analysts.

At Rs 1983.95 levels, the stock gets a discounting of about 72.4 times estimated June 2006 earnings. But the market is thrilled about the rapid sales growth projected for this industry.