Wired up

PENNY WISE

Chennai-based network equipment company Gemini Communications is charged up to deliver high powered growth, but its small capitalisation seems to be keeping institutional investors away.

The stock of Chennai-based Gemini Communications belongs to a rare breed. From just around Rs 15 one and a half years ago, the scrip has gone up by nearly 20 times to over Rs 300 now.

More importantly, for an investor, not only has the climb been extremely steady with no big fluctuations, the scrip, at around 15 times its trailing earnings, still retains a lot of value for investment.

The company, though smaller, is more attractively priced than other network infrastructure providers like D-Link and CMC, and more than makes up for its smaller size by its aggressive growth in an otherwise stagnant segment.

The scrip's surge has been due to a phenomenal profit growth of 723 per cent in the last four quarters, not all of which seems to have been factored into its valuation.

During the period, the firm has been able to improve its net profit margin from a measly 1.76 per cent to a healthy 9.14 per cent and net profit from Rs 1.13 crore to Rs 9.16 crore. And, this growth came without too much equity dilution. The company has augmented its equity by 19 per cent, from Rs 3.68 crore last year to 4.38 crore now. Its total debt accounts for less than 40 per cent of its total assets, though nearly a quarter of its revenues were with sundry debtors vis-a-vis 16-17 per cent for CMC and Tulip.

The company attributes its turnaround to its achievement of "critical mass" in its revenues from the wireless and telecom networking division as well as cutting down of the research and development (R&D) costs on its products last year.

Indeed, a look at the company's profit and loss accounts reveals how the small size of the company led to a disproportionate increase in its profits for a moderate revenue gain.

From a turnover of around Rs 35 crore in the financial year 2003, the company doubled its revenues at the end of the financial year 2005, while its profit after tax went up by nearly 2.6 times, to Rs 3.68 crore from Rs 1.38 crore. However, operating profit margin remained unchanged throughout at 9.5 per cent.

An important factor behind the sudden increase in profits, besides the small equity base of the company, is the preponderance of R&D expenses on its solutions in the total expenditure.

The company claims its research expenses have grown much slower than its sales, which went up from around Rs 20 crore in FY02 to more than Rs 100 crore in the calendar year 2005.

"In all, we must have spent about Rs 20 crore over the last three years just on readying our wireless and telecom solutions, an amount which is quite substantial for a company of our size," says R Vijaykumar, the 36-year-old chairman and one of the promoters of Gemini.

The company's expenses under the 'purchase of trading goods', under which it reportedly buries its R&D expenses, have remained at a high of 85 per cent for the last two years, lending credibility to the management's claim that profits were sacrificed for product innovation.

After all these expenses, today, Gemini is the country's largest wireless networking company in terms of the number of installations and boasts of nearly 1,000 clients, albeit mostly small and medium. The wireless and telecom business, on which the company spent most of its development resources, today acconts for nearly half of its total business.

"This year, we have also set up the entire telecom infrastructure to deliver wireless broadband to end-users in 75 cities for one of the biggest telecom companies in India," Vijaykumar, who along with his younger brother Ramkumar holds the promoters' stake of 32.5 per cent in the company, says.

"Networking is a very high-growth area," agrees Alok Shinde, head of ICT Practice at Frost and Sullivan, India. "But it is also one of the most challenging things for small independent players, as you are competing with multinational companies like Cisco, Nortel and AT&T," he adds, pointing to the biggest challenge faced by Rs 100 crore companies like Gemini.

Gemini was started as a manufacturer of computer monitors with a seed capital of Rs 70,000 in 1992 by Vijaykumar and Ramkumar, who is the present MD.

The company entered the networks infrastructure business in 1995, by adding modems and other small network equipment to its product portfolio. The next year was a water-shed year for the company, as it entered a market which hardly existed.

Over the years, the company successfully diversified into the related business area of wireless networking and later into networking services. The company was one of the first in India to launch a wireless enterprise package for corporates and remains among the top three in wireless networking solutions providers. The company's earlier business "� of installing wired networks for corporates "� has now been more or less taken over by multinationals such as Cisco and Nortel.

As part of its continued diversification, the company has now shifted its attention to Radio Frequency Identification (RFID) and Wimax "� two technologies that are expected to see major applications in the area of tracking and communication in the future.

Already a manufacturer and exporter of RFID-tracking equipment and antennae, the company is setting up the country's first RFID tag manufacturing facility in Himachal Pradesh and expects to derive nearly 15-20 per cent of its next year's revenues from this area.

Another new area, which the company entered last year, is the networks maintenance business and accounts for around 15 per cent of its revenues.

It has tapped the government sector, providing wired and wireless networking solutions and services to clients like the Indian Railways, ONGC, BSNL, Indian Airlines and the National Informatics Centre.

The government sector contributes nearly half its current revenues, though the proportion may go down as the company increases its focus on RFID and private telecom.

The company is expected to benefit from its increased focus on wireless, telecom, RFID businesses and A-Z network maintenance services, instead of just installations.

Adds Shinde of Frost and Sullivan, "The large enterprise market, even in India, has more or less been carved out among the biggies of the world like Cisco, Nortel and AT&T. The key to survival would be to focus on the experience you are delivering to the customer, to provide customised services at competitive prices. This has been demonstrated by companies in China. After all, your customer does not care which technology goes into the network as long as he gets the connectivity he wants."