Thursday, November 16, 2006

Aftek Limited : A stock for the future.

16-Dec-2006:
Just a few days back Aftek went rumbling down in the correction that happened. I had been monitoring this stock for a while but I never expected that it would go so much low. I was really astonished since I never expected that. And was just wondering why did this stock go so low. I had to reevalute this stock from a different perspective.

Net Profit 22.54(sept 06) 67.39(2006)

Balance Sheet
Total Share Capital 17.14
Net Worth 480.64
Total Debt 52.86
Net Block 11.26
Investments 118.40
Net Current Assets 401.56
Total Assets 533.50

* All values expressed in Crore Rs.

If you look at these financial details you observe that it has a very high Debt to Net Block Ratio for a Product based company. The Debt is slightly less than the yearly profits they make. Also they are in a major expansion phase mainly in products based income. Does it make sense to hold such low Net block in a product based company that too in a expansion phase?

Companies like 'Avaya Global', having mix of products and services revenue, are repeatedly questioned by the share holders as in why are they holding so much of Net Block. Certainly Avaya seems to know why they need those extra bucks for.

I think it makes sense for product companies to keep high Net Block because here the people matter more as compared to the people in service industry. Retaining employees in Indian IT industry has been a major chalenge these days. They also need more money for their Research and Development. There is lot of risk involved in Product based and may take years to break even and start making profit. It seems the company is more interested in Averaging out their cost and bring in marginal increase in profits by expanding.

I hope their strategy works and are able to retain Employees. Just providing Employee Stock Option plans with their stock value going down is certainly an issue.

I won't be surprised if they soon find that retaining employees is their major challenge for them.

Details regarding Seekport are still lot blur.
What kind of revenue model are they thinking about?
What is the Unique Selling Point as compared to Google?

Stocks like Baidu (Top most Chinese Search Engine) have a unique selling point that they are in China. Lots of big shots like Ebay, Yahoo failed terribly in their business in China just because Baidu is more stronger in the way they executed their strategy of capturing the Chinese Market. Baidu knows their demographics well. I am sure they aren't that great technically as compared to Google. But their strenght is they are just interested in capturing the Chinese market (now Japanese also). And they have also used a unique revenue model that clicked and increased their revenue by 10 times in the last quarter. This is lot of innovation!!.

This stock is certainly getting risker day by day.
http://www.moneycontrol.com/india/news/stocksviews/technicalanalystdeepakmohoni/becautiousaboutaftekinfosys/market/stocks/article/253535

Aftek certainly needs to bring in some good quarterly reports and some hopes for the Share holders. They have ended up keeping their feets in lots of ships at a time. I hope they are able to control all their ships and make them move in the same directions.


Recent Updates:
- "Aftek Infosys" was the orignal name for this company. The Shares dropped 10-15% when "Infosys" was removed from its Name.
- They have provided Stock Options to its Employees.

Key Investment Highlights:
CAGR of over 40% in last 5 years and is expected to continue for next 5 years.
Debt free company with over 450Cr of Reserves and Surplus.
Strong OPM (36% in Q1 FY07) due to leveraging of existing IP ( Intellectual Property ) and creation of new IP.
The company is very strong in Communication and Networking space and has strong relationship with many automobile vendors in the area of Car Telematics.
The company has entered in to a strategic tie-up with ESG Gmbh of Germany in the area of Car Telematics.
100% subsidiary Arexera is focusing on ECM (Enterprise Content Management) space with solutions for specific verticals like Compliance, Banking Security etc.
Hold 33% stake in Seekport a European Search Engine (Runs search engines in German, Spanish, English (UK), French and Italian languages).Seekport will launch an Indian Search engine and an Arabic Search engine in next 6 months and has plans to get listed in Nasdaq.
Holds 25% stake and 5% royalty over revenues in DigiHome Pvt Ltd which provides solutions for intelligent homes (This company also has plans to go public in next 2 years).
Another subsidiary Opdex is developing solutions for Energy management (A consumer portal will be ready for testing by summer next year).
Elven Technologies another associate company of Aftek (15% stake and will be merged very shortly) has recently acquired 100% India operations of Nasdaq listed AMCC.
Consistent dividend payer.

Overview
Aftek Limited is a 20 year old technology company which provides enterprise business management products, solutions and services which span infrastructure, information and process tiers of any modern business.
The company had a turnover of 202Cr (9 months as the company opted to make its accounting year March ended) in 2005-06 with a NP of 67Cr. Unlike its peer listed software companies in India which operates in low end ITES and BPO services this company operates in high end cutting edge technologies leveraging its IP (Intellectual Property). This makes investment in Aftek a high risk category with an equally high return expectation.

Understanding the business model of Aftek
Understanding the business model of Aftek is key for any decision for investment.The company has a unique business model which so far has worked well in favour of Aftek.
Basically Aftek works in two spaces, one Organic space and another Inorganic space. The organic space is all about the listed company Aftek which is the development factory that provides solutions and services to both inorganic tier and to other outside customers.The revenue generated from this organic tier and its capacity to raise money is used to invest in new companies which form part of the inorganic tier. These inorganic tier companies are separately managed and once they get mature will be integrated in to the parent company or will have different exit strategies to realize their full value.While Arexera, Opdex, Elven and V-Soft form that part of the inorganic tier which has already been merged in to the parent company or will be merged in the near future, Seekport and Digi Home are part of the inorganic tier which has got separate exit strategies.While growing the business in both these model the company had made sure that the core of these models is IP (Intellectual Property) which is either acquired or created.







ECM (Enterprise Content Management) and Search focus
The market for ECM software and services is expected to reach US $9 billion by 2007 in which the ECM software license itself is expected to reach US $3.9 billion by 2008. The area of Compliance and Process efficiencies are expected to be the key drivers of this growth. Arexera (100% subsidiary) with its superior and extremely fast search technology is focused on this space.Arexera competes itself with other players in this niche like FAST and Autonomy. Going forward we can expect Arexera tying up with some ECM vendor to sell its products.Also to maximize the profits Arexera itself is undergoing a restructuring exercise by forming a parent company in Switzerland, the result of all these will be visible by next year.Mean while another company Seekport which was created earlier using Arexera IP is now positioned as one of the major search engines in Europe. With presence in major European languages like German, Spanish, English(UK), French and Italian languages. Seekport is positioned itself has a regional search engine with a unique vertical search capability.The Arabic version of seekport (in which Royal family of Saudi has invested around 45% stake) will be out in next 6 months. The Arabic market is another untapped market which is growing very rapidly with around 25m internet users. The Indian version of seekport is expected by this year end.Aftek has 33% stake in seekport. While a Chinese search engine, BAIDU with around US$ 70m in sales is commanding a valuation of close to US $ 2.8 billion a similar opportunity also exists for seekport also when it gets listed in NASDAQ.Another cutting edge product that the company is working is called SEPA (Search Engine Performance Advertising) which will be available as an ASP with an optional backfill from seekport. This is an online end to end advertisement tool.

Energy Management Focus
Aftek is developing a Consumer Portal (in consultation with EPRI) which is a combination of hardware and software that enables two way communication between Energy Service Organizations (ESO) and equipment within the consumer’s premises.This product basically helps consumers to manage power consumption based on a Demand Response (DR) program.

Focus on Car Telematics
This is another area where the company has shown tremendous progress in terms of new customer addition and alliances.Telematics is a US $6 billion market in Europe (it is much larger in US). Telematics impacts all aspects of the automotive user experience from human-machine interface, navigation, mapping, traffic information, safety and security aids, and mobile internet to remote vehicle diagnostics and control.Aftek is one of the very few companies in India to specialize in Automotive Telematics Embedded Technologies related with the Automobile vertical. Aftek is already providing its services in this field to one of the world's biggest and most prestigious automobile manufacturers - BMW.
Recently Arexera had entered in to a strategic tie up with Germany based software major ESG Gmbh, one of the largest players in this field for a period of 5 years. Going forward this relationship is expected to yield positive effect on Aftek’s financials.

Merging Elven with Aftek
Aftek has initiated the process of merging Elven (where aftek holds 15% stake) with itself. Elven operates in the area of Electronic Design Automation (VLSI and ASCI design verification and testing).Elven recently acquired 100% of AMCC Technology Solutions India Pvt. Ltd., Bangalore, the Indian subsidiary of US-based, Applied Micro Circuits Corporation (AMCC), a NASDAQ listed company. After this Elven will initially provide engineering services to AMCC. This acquisition also helps Elven to offer similar type of solutions to other customers also.

Valuation and Financials
This is the most surprising element as any one would think that a company with such prospects would trade at a much higher valuation. In contrary Aftek is still trading very cheap an indication of the fact that market has really not factored its business prospects well. This can also be due to the fact that majority of its business model is still evolving and carries a high degree of risk.The market cap of Aftek is just above 500Cr and this year the company is expected to report sales in the vicinity of 350Cr. This year expected EPS is in the vicinity of 18Rs and at the current market price of 60Rs the stock trades at a PE of just 3.33 FY07 earnings. Now this is despite the fact that many its peers trade at an average PE of 10-15.Apart from all these other comforting factors in valuation is the companies in which Aftek has invested. The 33% stake in Germen search engine seekport can act as a surprise value unlocking factor.The latest shareholding of Aftek (Sep Qtr) shows Government of Singapore Investment company and UBS Asia as its shareholders holding substantial chunks of shares.Due to all these factors and the presence in high value segments I expect the company’s stock price to witness significant re-rating in the brouses and investors can take exposure at the current market price keeping a long term view.

Concerns
After all those positives there are some concerns also for this stock. The major factor is that the company operates in a very niche and high end technical area where the risk of failure can be very high. Also most of its high profile business models are still in development phases.Another uncomforting factor is the very low promoter holding (around 12%). The main reason behind this is because of the dilution of equity for GDR and FCCB. Though I expect the promoter holding to rise after the merger of Elven.

Conclusion
Aftek unlike its other software peers is constantly moving up the value chain and has a strong focus on creating and acquiring new intellectual property. The company is expected to grow at a CAGR of 40% for the next 5 years. I believe that the market cannot ignore these positives for long time and the stock is expected to get rerated. Based on these factors I recommend a buy rating on the stock with a long term perspective. But also monitor that all these sub-ordinate or sister companies work out well.

Note: Some of the views has been taken from another website for reference.
http://indianstockresearch.blogspot.com/2006/11/aftek-limited-stock-for-future.html