Stock Pick From The Computers Sector

HERE IS WHY:

• Improvement in debt position
• Incurred capital expenditure and infrastructure enhancement for the next two years
• High chances of a rise in profitability over the coming years

Copious amounts of cash, no debt, growth in multiples and high profitability are common with companies operating in the Indian IT sector. While the IT companies are now looking at new avenues for growth after having reached ideal fundamentals, Helios and Matheson Information Technology (HMIT) is rapidly moving towards a premium status, thus offering investors a growth story to ride on.

HMIT is a mid-size IT services provider with a strong presence in the US, which contributes to 60 per cent of its revenues. Its focus area is BFSI (Banking, Financial Services and Insurance) wherein it provides all round services across the value chain. Apart from this, it also has presence in the verticals of healthcare and technology. In fact, three years ago, it made a shift of focus from healthcare to BFSI, which turned out to be in favour of the company.Its strength has been its relationship-based approach that has led to a strong portfolio of large blue chip clients. With 70 per cent revenues coming from onsite work and concentration on non-discretionary services combined with the ability to meet clients’ requirements, HMIT has the potential to maintain and scale up its accounts.

Over the years, HMIT has made several acquisitions in order to strengthen its presence either geographically or in a vertical. But the growth achieved through this has come at a cost. The company funded these acquisitions using debt. It had taken a FCCB of USD 25 million to fund the acquisition of The A Consulting Team (TACT) in 2006.

SHAREHOLDING PATTERN AS ON (31/03/2013)
Promoters		43.34
FII		0
DII		0.66
Others		56
Total		100

HMIT has a debt/equity ratio of 0.8x while its peers average 0.06x. Interest costs amounted to over 20 per cent of its operating profit in FY12. This led to HMIT operating at a net profit margin of 6.36 per cent while its peers averaged 11.75 per cent. Noticeably, the debt has reduced profitability for HMIT. But the road ahead stands at an improved outlook.

HMIT redeemed its FCCB in a single direct payment of over Rs 100 crore in July 2011. It now stands with a debt of Rs 257 crore and net cash of Rs 47 crore. Moreover, it has in place, the necessary infrastructure for the next two years and is expecting no capital expenditure beyond routine replacement/renewal, which is capable of being funded with internal accruals, thus ensuring improvement in profitability.

HMIT’s asset turnover ratio stands at 0.74 while its peers average 1.72. The capacity addition seems to have created a low utilisation scenario at present. But what this shows is the potential left in it over the next two years where it will not make any enhancements. This only strengthens the profitability outlook for HMIT.

In the last four quarters, its average sequential growth per quarter in revenues has been 9.78 per cent. The same for its operating profit and net profit is 17.43 per cent and 19.28 per cent respectively, which shows a drastic improvement in profitability and a distinct path of outperformance.

One area that appears to be of concern is that 35.30 per cent of HMIT’s promoter holding has been pledged because of financial assistance for the company’s business. However, this has been historical and has occurred in the growth phases of the company. No new shares have been pledged in the last few years and there seems to be no requirement considering the current and prospective position of the company.

HMIT is clearly on its way towards improvement in its fundamentals ensuring outperformance in the coming years. Moreover, signs of a robust performance have been visible since the last few quarters. It is available at a PE of 6.14x which is way lower than its mid-size peers and the IT industry as a whole, making it rather attractive.

LAST FIVE QUARTERS (Rs/CR)
	Mar '13	Dec '12	Sep '12	June '12	Mar '12
Sales	105.53	96.33	86.99	80.03	72.67
Operating Profit	18.42	16.55	13.61	12.21	9.74
Interest	6.39	6.21	5.73	4.65	4.03
Net Profit	9.26	8.27	6.98	5.96	4.6
Equity Share Capital	25.16	23.91	23.91	23.91	23.91