Stock Insight: Tech Sprinter | Value Research Prithvi Information Solutions is set for a re-rating with its unique business model and foray into high-end services
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Stock Insight: Tech Sprinter

Prithvi Information Solutions is set for a re-rating with its unique business model and foray into high-end services

Prithvi Information Solutions (Idirect Code: PRIINF), one of the fastest growing companies in the Indian information technology space, is planning a foray into high-end and high-margin services like business intelligence, networking solutions and knowledge process outsourcing (KPO). The company is a global provider of technology and business outsourcing to industries like banking and finance, health care, manufacturing, distribution, logistics etc. The bulk of its clients is based in the United States.

The company has served over 85 clients in the United States and India and is one of the fastest growing companies in its field with a compound annual growth rate (CAGR) of 84 per cent since its inception in 1998.

The company has offshore delivery centres in Hyderabad and Bangalore. The company leverages on its global presence and has offices spread across North America and Europe.

With a unique business model, the company is not entirely dependent on its top clients. Its top client contributes only 9-11 per cent to revenues and the top 10 clients contribute less than 40 per cent of total revenues compared with other mid-cap companies in the information technology space, which derive more than 60 per cent of their revenues from the top 10 clients.

The company has a well-diversified customer base and is adding new clients at a fast pace. PISL has put in place de-risked business model with revenues coming from various verticals. Technology is the highest contributor with a 32 per cent share, while manufacturing, telecom, retail and banking, financial services and insurance (BFSI) contribute 15 per cent, 14 per cent, 13 per cent and 12 per cent, respectively. Apart from increasing its market share in these sectors that have immense growth potential, the company is also enhancing its presence in other areas like healthcare and retail.

Currently, the company derives more than 90 per cent of its revenues from on-site activities, where margins are thin. Therefore, the company is planning to increase its offshore activities to give a boost to its profitability.

The proceeds from its recent public offering were used for setting up an offshore unit in India. The company earned about 8 per cent of its revenues from offshore work and it expects the contribution of offshore activities to rise to 15 per cent in the current financial year.

Most of its knowledge process outsourcing and business intelligence activities are expected to be offshore. The company expects to cash in on the booming knowledge process outsourcing sector, which is likely to be a $15-billion plus industry by 2010.

New businesses will contribute nearly 60 per cent to revenues in FY07 up from the current 40 per cent. This will increase the overall margin for the company and in turn the bottom line.

Prithvi Information Solutions is planning to acquire companies specialising in business software, data warehousing and electronic governance in the price range of $7-22 million. The acquisition will be funded through a foreign currency convertible bond (FCCB) issue of around $70 million, which is yet to be finalised. PISL currently has orders worth $150 million to be executed within 18 months.

Simultaneously, the company will also be increasing its headcount to 1,100 employees from the current 400. It is also entering into a partnership with WiFi Telecom in the telecom space and Effigent Technologies in the enterprise resource planning (ERP) space given the strong growth in both the sectors.

Prithvi Information Solutions recorded a 49.8 per cent growth in top line from Rs 305.46 crore in FY05 to Rs 457.65 crore in FY06. Bottom line surged by 88.3 per cent from Rs 28.69 crore to Rs 54.03 crore during the same period as operating margin expanded from 9.5 per cent to 11.5 per cent due to the shift of some activities offshore.

In the first quarter of FY07, the company displayed a strong performance with net profit rising 5.5 per cent quarter-on-quarter (80.7 per cent year-on-year) to Rs 18.48 crore. Top line increased 2.05 per cent q-o-q (42.35 per cent y-o-y) to Rs 143.83 crore. Going forward, the company is expected to post a top line of over Rs 500 crore and over Rs 700 crore for FY07E and FY08E, respectively. Bottom line is also expected to jump to around Rs 80 crore and Rs 110 crore in FY07E and FY08E.

For the company, another concern remains that of the exchange rate risk. Since the company derives a bulk of its revenues from the US, any fluctuation in dollar rates may adversely affect its revenues. Margins may not increase dramatically as it takes time for the benefits of offshoring to kick in.

At the current price, the stock seems significantly undervalued from a one-year perspective. The company looks set for a re-rating following its foray into high-end and more profitable services such as business intelligence, networking solutions and knowledge process outsourcing. The company is set for a fast-growth trajectory and margins are likely to improve on increased offshore business and acquisitions. Manpower shortage is the peculiar problem faced by the software industry in India. Though wage costs in India have historically been lower than in the United States, a wage hike cannot be ruled out. Moreover, since the company is planning to increase its manpower strength to 1,000 in India, higher wages could have an adverse impact on its margins.

Source: Idirect




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