With infotech stocks in the limelight and enjoying a discounting in the region of 25-30 times, the Delhi based IIS Infotech appears to be relative cheap. Listed on the OTCEI, IIS Infotech (IISI) trades at Rs 44, discounting its latest earnings of Rs 6.04 just seven times. Being an OTCEI stock partly explains the poor discounting. But considering the industry prospects and the interest in infotech stocks, the Smart Investor decided to investigate this stock.
IIS was promoted by three qualified and experienced software professionals in 1990 as a private company. The initial venture was to undertake onsite software projects for clients in the United Kingdom. IIS became the first Indian software company to set up high speed data communications links to UK and execute software projects for overseas clients remotely.
In three years the company notched up a turnover of Rs 6 crore in 1993-94, but was still a small player. In 1993-94 the company acquired a UK software company called Third wave and renamed the company IIS Plc. This subsidiary serves as a marketing office and a customer support center.
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It also made a big move by merging with another Indian company called ISCT, which was a publicly listed company on the OTCEI. With this merger IIS gained a foothold into the US market for exports and also became a player in the IT training market.
This merger served two purposes. The first was the entry into the US market. Secondly, it provided access to cash. This was necessary because the whole business was turning investment intensive business from a low investment business. The IT training business provides an interest free working capital and the franchising model also provides a steady cash flow with low investment. With the two moves, the companys turnover shot up to Rs 23 crores in 1994-95.
But in 1995-96 the companys turnover remained stagnant. The companys chief operating officer explains this decline Our exports actually grew by 19 per cent but the overall turnover declined because ISCT had five one-time domestic projects which ended. The profitability from exports increased by 19 per cent during this period too.
But in that year the company got into strategic alliances with companies in different countries to be able to market its projects services in these countries. It entered into an alliance with Deloitte and Touche in South Africa, Bania IIS in Netherlands, RSI Sistemi in Italy, OPS in Germany, IFS in Sweden, and several more companies in the USA and UK. In addition, the company has its own subsidiaries for marketing in the US and Singapore.
All this had an effect on the turnover in 1996-97. Its turnover increased by 50 per cent to Rs 40 crore. Of which, Rs 10 crore came from training and the remaining 70 per cent came from offshore software development and 30 per cent from onsite software development. Currently, the company has two development facilities in Delhi, a mainframe software development facility in Mumbai, another facility in Bangalore. It plans to set up facility in Chennai too. It also has communication links to the US and the UK and all its Indian offices are also connected by high speed links. IIS has made investments of about Rs 8 crore in increasing its infrastructure in the year 1996-97.
The companys education division has 135 centers across the country. It is targetted to have a turnover of about Rs 16 crore in 1997-98. The company has a tie-up with New Horizons, one of the largest IT trainers in the world and intends to use their methodology and material. In addition they have also set up centres to train software developers for the Year 2000 problem and also Microsoft technology centers. IIS has been building a brand for itself in IT training by jointly conducting courses with IIT Delhi. It also has set up a sprawling, 75 acre campus for management education in Cochin in association with ENPC of France. This campus contributed to about Rs 3 crore of the turnover.
The total turnover of the company is expected to be about Rs 65 crores next year in line with an expected 50 per cent growth in the industry. About 40 per cent of the companys turnover is expected to come from the solving the Year 2000 problem. The current order book can support this target. IIS in addition to the current software exports business has decided to enter two niche areas through two subsidiaries. The first is IIS-XOX with equity partnership with XOX. The second subsidiary, IIS Vision works is IISs venture into multi-media on the Internet.
The companys operating profit margins at 24 per cent and its return on net worth at 23 per cent are not too impressive by software industry standards. The company has to move up the value chain and its financial reporting has to improve before it can command a very high discounting.
However a back of the envelope calculation indicates a surprise element making IIS a company to watch closely. IIS is expected to make investments of Rs 16 crores this year which will be funded entirely through foreign currency .
So if the companys turnover increases to Rs 65 crore as targetted and one assumes that the company is able to retain at least 24 per cent margins, it is possible that the RONW would cross 30 per cent. That makes the stock appear more attractive. The EPS next year is likely to be about Rs 10. The current price discounts this EPS around four times. The stock definitely deserves better discounting than this and would probably get it if it did move to the BSE.
The turnover is expected to be Rs 65 crores next year in line with an expected 50 per cent industry growth. About 40 per cent of the turnover is expected to come from solving the Year 2000 problem.