Bharti: Right connections

Outsourcing leaves Bharti free to concentrate on core functions

After outsourcing its network management and IT requirements, Bharti Televentures has outsourced its call centre operations to four Indian business process outsourcing (BPO) companies.

The company also announced a technology outsourcing deal with Nortel, which will deliver technology and resources required to provide varied customer services.

With much of the work having been outsourced, Bharti is left with the task of planning, product innovation, marketing and brand building, and administration.

The deal is worth Rs 1000 crore over a four to five years. There wouldn't be much in terms of savings, except for the fact that it would result in a reduction in capital investment.

The outsourcing deal for its network building and management requirements last year included a clause which needed Bharti to pay only for utilised capacity. While this would have resulted in savings, the other reason for the deal was the prospect of an improvement in service quality.

Payments, penalties and rewards were linked to network quality and service levels provided by Ericsson, for instance, which ensured that service levels would be better.

Besides, Bharti's network management deal with Ericsson also enabled it to get "capacity on demand", which meant that scaling up would be that much easier.

Analysts point out that managing scale would be one big challenge for telecom operators in the near future, considering the rate at which growth is happening. With Bharti having outsourced key operations to industry leaders is the space, it looks well set to meet that challenge.

For some reason, though, Bharti seems to be the only major player to rely on outsourcing to such a large extent. As of now, Bharti's outsourcing moves have been beneficial, but it'll be some time before one can determine which strategy is better.

Man Industries

Man Industries (I) Ltd has reported a 106 per cent growth in its profit before tax to Rs 10.46 crore in the June quarter, riding on the back of a 140 per cent growth in net sales.

Sales momentum in the last quarter has been provided by several factors "" surging exports of pipes to global upstream oil and gas companies coupled with aluminium profiles supplied to user industries in the overseas engineering and construction sector.

As a result, exports were valued at about Rs 62 crore in the June quarter compared with very low levels a year earlier. Senior company management highlighted that implementation of expansion plans announced by domestic oil and gas players has been slower than expected""- hence the emphasis on overseas markets.

The growth momentum has also been provided by its bevelling business which grew to Rs 44.56 crore as compared to nil a year earlier.

This business primarily involves coating of pipes for third party suppliers. However, margins in this business are extremely low "" company's segment margins were 1.92 per cent in the last quarter.

Senior management highlighted that this line of business was implemented to improve capacity utilisation at their new factory at Anjar, Gujarat and that this business segment was not a priority, going forward.

Nevertherless, operating profit grew 92.54 per cent to Rs 15.75 crore in the June quarter, but operating profit fell 323 basis points to 13.03 per cent. Lower margins are owing to raw material costs jumping 165 per cent to Rs 95.22 crore "" the management says that higher raw material cost has to be viewed in the context of the recent expansion of their production facilities.

The company's order book is valued at approximately Rs 1,100 crore at the end of the last quarter, a growth of almost 450 per cent on a y-o-y. The company's margins are expected to improve thanks to the recent drop in steel prices.

Sasken Communication Technologies

Sasken Communications Technologies, a communication software company, is issuing shares worth Rs 115-130 crore at a price band between Rs 230 and Rs 260. This values the company between 16.5 and 18.7 times its consolidated EPS for the year ended March 2005.

Flextronics Software Systems, the only comparable listed company in the communications software space, trades at an FY05 PE of 19.4 times. Not long ago, Flextronics traded at a PE of about 16.5 times, and the reason it gets a higher valuation now is because its parent company has announced its intent to buy out all minority shareholders in the company.

While Sasken's top line grew at a faster rate compared with Flextronics last fiscal, its net profit growth was lower than Flextronics'. More importantly, Sasken's net profit margin was much less than that of Flextronics'.

One of the risks associated with Sasken's business model is that all of its revenues come from telecom. Besides, just two of its clients account for 48 per cent of revenues.

Some analysts point out that this can also be seen as a positive sign, since it points to strong client relationships. The dependence on a top few clients may, however, be cause for concern.

Significantly, the IPO and other large private equity offerings this year would result in a 63 per cent jump in the company equity base compared with March 2005.

What this means simply is that earnings would have to grow by 63 per cent in FY06 just to maintain the company's EPS at last year's levels (that is if one were to use the year-end equity to calculate EPS). EPS growth this year, therefore, may not be exciting.

One heartening factor for investors is that strategic investors such as Nokia (a client) and MVC VI FVCI (a venture capital fund) invested in shares in the company this April at a price of Rs 223 per share, not much lower than the IPO price band.

With contributions from Mobis Philipose and Amriteshwar Mathur