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Digital's profits zoom 200%, with Compaq's help

NetScribes/Ganesh Ramamoorthy

A strong relationship with Compaq has proved to be a major plus for Digital India, which reported a 200 per cent growth in both the top line and the bottom line for the quarter ended March 31, 2001, compared to the year-ago quarter.

At a time when the Indian software industry is facing the slowdown blues, analysts say, the assured business from Compaq is providing adequate cushion to Digital to build up a strong marketing team and emerge as a decent size software services company.

For the quarter ended March 31, 2001, the company reported total revenues of Rs 652.2 million, up 200.3 per cent over the Rs 217.2 million in the same quarter last year.

Net profit grew by another 200.5 per cent to Rs 185.4 million in the quarter from Rs 61.7 million in the year-ago quarter.

On a yearly basis, the company reported a 110 per cent growth in total revenues to Rs 1.97 billion, and another 110 per cent growth in net profits to Rs 543.2 million.

Also, the company reported a huge 368 per cent growth in business from Europe and Asia-Pacific to Rs 341 million in financial year 2000-01.

The company has provided for accelerated depreciation of Rs 360,000 during the quarter and Rs 17.8 million for the full year ended March 2001.

The company has also recommended a dividend of Rs 2.50 per share for the year.

Sales revenues grew 19 per cent, while net profits grew 12 per cent on a sequential basis, in line with analyst expectations.

The operating margin for the quarter, however, dropped to 29.7 per cent from 31.4 per cent in the previous quarter on account of higher sales and marketing expenses.

Analysts say the fall in margins was expected, as the company had earlier said it would step up its marketing expenses to target more non-Compaq clients and reduce dependence on Compaq business.

However, analysts said the margins would stabilise at the current levels in the coming quarters, as the increase in offshore business (at 34 per cent currently) would offset the higher sales and marketing costs.

While Compaq business is expected to provide enough cushion to Digital during the slowdown period, analysts are concerned that the non-Compaq business is not picking up faster despite the addition of 10 new clients during the quarter.

Compaq still remains Digital's top most client, contributing to about 88 per cent of its revenues, a marginal increase from 87 per cent in the last quarter. And on a sequential basis, Compaq business grew 20.5 per cent in the quarter.

However, the non-Compaq business growth rate slowed down to 9 per cent during the quarter, as against a sequential 63 per cent growth in the previous quarter.

Though the company is aiming at a 50:50 business from Compaq and non-Compaq clients, analysts say, non-Compaq business should grow fast enough to reduce its dependence on Compaq.

"Going ahead, it needs to be seen how Digital accelerates the non-Compaq business. The risks remain because of high client concentration but there are benefits because of that too, since the assured business helps in difficult market scenario," said Priya Rohira, an analyst at Pranav Securities.

While Digital has delivered strong results for the last four quarters, indicating signs of turnaround, analysts say that market expectations, which have gone up, will put pressure on the stock if the expectations are not met.

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