Micro Technologies: Outsourcing strategy

ANALYSTS' CORNER

Brics PCG Research, in its company update on Micro Technologies, recommends a "buy". The report states that there has been a shift in the company's strategy towards outsourced manufacturing.

The company's focus is on R&D. Its core strength lies in developing new applications and enhancing the existing ones. Over the years, it has developed a range of innovative products that are now receiving market attention.

The company now intends to focus on R&D for new product development rather than product manufacturing. It has partially outsourced the manufacturing of VBB devices to two vendors. It now manufactures only the core chip software for this product, which is then sold to the vendors.

In the past few months it has formed a technological alliance with Sony Ericsson for developing high-tech wireless products.

However, the company is research-centric, which suggests that not every product that it develops would be marketable. There could be instances where the investments made on research may fail to yield any returns.

NIIT Technologies: Vertical focus

Emkay Research, initiating coverage on NIIT Technologies, recommends a "buy". The company offers application development and maintenance, enterprise solutions and BPO services with focus on the banking, finance, insurance, transportation and retail segment.

Its focus verticals contributed to 66.2 per cent of FY06E sales as against 52.8 per cent in FY04, reporting 24 per cent CAGR.

However, revenues from other verticals declined from 45.4 per cent of sales in FY04 to 34 per cent in FY06E. The report expects a decline in its other verticals to stabilise and the focus verticals to grow at a CAGR of 20 per cent over FY06-08E. Its revenues are expected to grow at a CAGR of 15.6 per cent to Rs 808.4 crore.

EBIDTA margin is expected to improve driven by turnaround in its BPO business, offshore shift, better utilisation rates and SG&A leverage. The stock trades at 8.4x and 6.8x FY07E and FY08E EPS estimate of Rs 21.4 and Rs 26.3 respectively.

Mphasis BFL: New range of services

Kotak Securities has changed its rating on Mphasis BFL from "buy" to "hold" based on its earnings estimates for FY08. The report maintains its earnings estimates and expect the company to report net profits of Rs 192 crore and Rs 224 crore in FY07 and FY08 respectively.

This would translate into EPS of Rs 12 and Rs 14.1 for the corresponding fiscals. The company has over the quarters broadened its range of services and is now focusing more on newer areas like embedded software and consulting.

More profitable revenues are expected from the platform-based BPO services from FY07. These strategies will lead to greater stability in the revenue stream coupled with improving profitability.

The report has assumed the rupee to appreciate to Rs 43 by FY08 end. Favourable movements in the rupee can lend potential upsides to the projections.