Well grounded

PENNY WISE

Prithvi Information Solutions is considering inorganic initiatives after achieving high growth organically.

Last year, more information technology stocks remained in the red than those in the green, especially the small and mid-cap companies, underperforming the broader markets. While investors looked for stocks with promising potential to provide an upside, just a handful of stocks kept the sector afloat while others plunged.

Now, when the markets have consolidated and corrected for more than a couple of weeks, it would be a good time to look at those stocks which have taken a beating and have almost bottomed out.

The catch here is to look for visible earnings, and the company's potential to rise above the rest. One such example is Prithvi Information Solutions, which has not only recorded high organic growth, but is now all set to shift to cruise control the inorganic way.

The company plans about four acquisition deals across the US and India by December this year, for an aggregate consideration of $40-50 million (around Rs 180-220 crore). For this purpose, it had raised $50 million (Rs 220 crore) last year through zero per cent foreign currency convertible bonds (FCCBs) to Lehman Brothers.

Modest beginnings
Prithvi Information Solutions has been a process offshoring and outsourcing company, catering mainly to its clients in the US. It has since moved on to being a technology solutions provider in the domains of application development and maintenance.

The company operates in verticals like telecom, banking, financial services and insurance (BFSI), retail, government, small and medium technology enterprises and healthcare. It has maintained a sharp growth trajectory along with steadily rising margins.

Over the years, Prithvi has proven its onsite capabilities, and now it is strengthening its offshore presence. Currently, onsite projects contribute about 90 per cent to its revenues, while the rest comprises of offshore projects.

"We are now looking at equal contributions from offshore and onsite activities by putting in place a global delivery model, " says Madhavi Vuppalapati, founder and chairperson, Prithvi. The company is setting up a new offshore development centre (ODC) in Hyderabad, with an investment of Rs 30 crore, which is expected to turn operational by September 2007.

It has recently opened an office in Qatar, and is now concentrating on Europe. Europe and Middle East are high-margin geographies.

Going shopping
Prithvi has recently announced an acquisition drive with the money it has raised via an FCCB placement, and has shortlisted about six-eight companies to acquire.

"We're at an advanced stage of due diligence with all these companies and expect to carry out about four acquisitions by the end of CY07," says P Shastry, chief finance officer, Prithvi.

These acquisitions will help the company to add to its existing skill-sets and expand its clientele, and the company will expand its geographical footprint by acquiring outfits based out of countries other than the US.

"Almost all of these companies have a combination of onsite and offshore capabilities, on a varying scale and in different domains," claims Madhavi.

These acquisitions will cost approximately Rs 220 crore. "We expect these companies to bring in about $40-50 million in revenues, the benefit of which will be visible in Prithvi's numbers by FY09," says Shastry.

Stepping up
In addition to these acquisitions, the company has recently forayed into the domains of knowledge process outsourcing (KPO) and data analytics among its services offered, while on the client side, it is also taking up e-governance projects with certain state governments in the US.

The company has also entered the Indian markets by acquiring telecom clients. Among its existing clients, the company is looking at expanding its average revenue per client, by focusing on its skill sets, developing specialised solutions and hence getting involved in the clients' information technology strategy development.

The company derives about 80 per cent of its revenues in the form of repeat orders from its existing clients. The company currently employs about 1,600-odd people, and it plans to double the headcount over FY08. 
 

GROWTH NUMBERS
Rs crore	FY06	FY07E	FY08E
Revenues	452.72	679.00	848.75
Operating profit	53.63	96.00	118.83
Net profit	53.34	85.00	93.36
EPS (Rs)	-	46.96	51.58
P/E (x)	-	5.71	5.20

Valuation
Although the stock has underperformed the sector for a large part of the last year, there is a strong possibility of an about turn considering the company's plans.

Prithvi has steadily registered a compound growth of about 29 per cent in its revenues over the past four years, and has maintained its operating margins at about 12-13 per cent which it is targeting to improve to 15 per cent. Entering specialised high margin domains like data analytics will improve earnings.

In order to boost its margins, the company is pushing for increasing the share of offshore activities in its revenues, which is currently contributing only about 10 per cent to the top line.

The stock is valued cheap at about 5.7 and 5.2 times its estimated FY07 and FY08 earnings respectively, considering the valuations of its comparable peers having a similar business model and operating margins, like KPIT Cummins Infosystems, Hexaware Technologies and Mindtree Consulting which are trading at about 18-20 times their estimated FY07 earnings, and nearly 14-16 times estimated FY08 earnings.

Prithvi's expansion drive is already underway, which will start yielding results by the third quarter of FY08. Taking this into account, investors may want to consider their bets.