The Big Bull of Dalal Street, Rakesh Jhunjhunwala, has been on a buying spree, of late. In October, Insync Capital Partners LLP, an entity owned by Rakesh Jhunjhunwala, had bought 4.25 lakh shares of Tourism Finance Corporation and, in September, it had purchased 3.5 lakh shares of Adlabs Entertainment. As 2016 drew to a close, Jhunjhunwala made his last big purchase of the year. Insync purchased 295,000 shares of Datamatics Global Services at Rs.102.08 a share, cumulatively worth Rs.3 crore. Amrita Vidur Bhogilal, one of the promoters of Datamatics, who held 11.8 lakh equity shares, sold about 5 lakh shares in the open market, of which Insync bought 2.95 lakh shares.
As expected the news set the counter on fire, with the stock vaulting 39% to its current level of Rs.143 a share. Promoted by Lalit S Kanodia, the first CEO and founder of Tata Consultancy Services, Datamatics is engaged in IT and BPO services. The company, which clocked a turnover of Rs.816 crore in FY16, has seen a 24% CAGR since FY11 by focusing on integrated data solution to clients and businesses that heavily rely on data and robotics. It is being seen as a play on digital initiatives taken by businesses and the government. In the past, the company had invested heavily in the products business and acquired several technologies to create an edge in this space. It is also setting up a new facility in Puducherry to cater to global customers.
Thankfully, the expansion is being largely funded through internal accruals. In FY16, Datamatics generated Rs.61 crore in cash from operations. As a result, its debt-equity ratio is comfortable at 0.2 times with an interest coverage ratio of 9 times. Incidentally, though the balance sheet has doubled from Rs.361 crore in FY13 to Rs.646 crore in FY16, profit growth has not been as impressive — growing from Rs.31.5 crore to Rs.44 crore over the same period. This is largely because the company makes a mere 5.4% in net profit margin, which is considerably low. This equation can possibly improve with higher operating leverage and improvement in the asset turnover, resulting in higher earnings and cash flow.
The Street estimates suggest close to Rs.950-1,000 crore of sales and net profit of close to Rs.75 crore by the end of FY18, which means net profit margins will be close to 8%. The company’s peers such as Nucleus, SQS India, R Systems, Cigniti Technology are all generating net profit margins in the range of 8-14% and return on capital in the range of 20-50%. As a result, most of these stocks are trading at 20 times reported earnings compared with 11 times for Datamatics.
If Datamatics is able to capitalise on its transition to high margin business, margins and return ratios will start looking better, resulting in better valuations on an increasing earnings base. That apart, the Street is also counting on a higher dividend. At Rs.6-7 crore, the annual dividend is just 10% of its operating cash flow since a large part of the cash is redeployed into the business.