>Datamatics Technologies

Datamatics Technologies-In Fidelity we Trust

CMP Rs 52

Recent Order wins from US based mutual fund Fidelity, are likely to bring about a change in fortunes for the largest BPO and KPO concern listed in Mumbai. Solid financials for the Q2 ending September 2006, will provide the spark to this counter. We expect the counter to outperform the IT outsourcing workspace in the short run.

Key Drivers

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The company is the largest player in the Content Management KPO domain

in India, and is set to benefit from the growing opportunity in the years ahead

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DTL has been selected in the Top 100 Outsourcing Vendors worldwide at

the 2006 Outsourcing World Summit

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DTL works on the variable employee model (Knowledge Associates) and so

it can manage its utilization rates much better

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At current price the stock has a dividend yield of 4%

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The company currently has cash and investments in debt mutual funds of

over Rs 30 per share

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The company is trading close to its 52 week low

Background

Datamatics Technologies Ltd (DTL) is one of the largest non voice third party business process outsourcing (BPO) company in India. It is based out of Mumbai & is the only listed non-voice BPO company in India. DTL currently has subsidiaries in the USA,

UK and Germany. The company offers services are in the following domain

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Content Management

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Back Office Processing

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Related Software Services

CONTENT MANAGEMENT

– DTL provides these services to large publishing houses, information providers, market research firms & litigation support providers. The company counts among its clients 4 of the world’s largest 10 publishers. The company currently provides services around data capture, copy editing, context addition, indexing, document conversion & formatting and is making inroads in high end services like editorial services and content writing. This segment is the most profitable.

BACK OFFICE PROCESSING

– This includes accounts payable, claims processing, accounting & tax processing, financial transactions processing, documents, forms & Text processing & Healthcare claims processing. Processing tax returns and

managing accounts payables, especially for the US forms the bulk for this division’s revenue.

RELATED CONSULTING SERVICES

– DTL provides related consulting services in partnership with FileNet & Hummingbird in Document Management & Workflows and Data Integration & Warehousing The company has technology alliances with Filenet, Hummingbird, Cognos, Ascential, Computer Associates, Informatica,

KOFAX & Bizflow and has emerged as the premier workflow solutions provider based out of India.

Shaping Up through Acquisitions

In 1996, the DTL made a strategic Investment of about 5% in Saztec International Inc. In November 2003 DTL acquired the remaining stake and thereby it became a 100% subsidiary. In June 2003, DTL acquired 20% stake in Knowledgeworks Global

Limited, Mumbai for Rs 10 lakhs. In September 2003, DTL acquired 100% Equity of CorPay Solutions Inc for USD 10.0 Million.

Growth through Joint Ventures

DTL formed a Joint Venture with Cadmus Communication Corporation (a NASDAQ listed company) namely Knowledgeworks Global Limited (KGL). KGL provides content processing, content management and related services to scientific, technical and

medical journal publishers. The company had over 450 people on its payrolls as on 31 Jan 2006. Due to slower ramp-ups than expected KGL had an operating loss of Rs. 1.1 Cr for FY 2004-05. DTL has recently signed an agreement on 31 March 2006 to

sell its entire 20% shareholding in KGL to Cadmus Knowledgeworks International Ltd, Mauritius at a consideration USD 1.5 Million.

Knowledge Associates

The Knowledge Associates programme gives the Company an access to a huge supply of skilled workforce. Through its Knowledge Associates programme the Company enhances its delivery capability by utilizing the huge untapped talent of

qualified women professionals who are unable to do a full time job but would like to work flexible hours at home. The company currently has over 1405 Knowledge Associates and has extended this network in Nasik in March 2006.

Content Management Opportunity

The industry as a whole registered 41% growth to reach Rs 25,080 crore, up from Rs 17,830 crore a year earlier. The year also saw the emergence of knowledge process outsourcing (KPO) as a high growth opportunity & comprised vendors like WNS,

Office Tiger and Datamatics Technologies providing higher-end research and analytic based services in traditional service lines as well as new business areas.

The publishing vertical is emerging as a fast growing opportunity for the Indian KPO sector. Publishing services that are offshored today range from editorial and project management, to illustration, proofreading, page composition and layout. Some

companies like DTL prefer to call this content management.

Currently the bulk of the outsourced work is still pagination, data tagging and conversion. An Evalueserve report reveals that the Indian KPO sector, with revenues of 0.72 billion in 2003, accounted for 56 per cent of the global KPO sector. This share of

the Indian KPO sector is expected to increase to 71 per cent of the global KPO sector, with revenues of $ 12 billion by 2010.

The publishing vertical is expected to account for 12 per cent of the estimated opportunity. Evalueserve estimates the number of jobs in the KPO space will increase from the current 25,000 to more than 250,000 by 2010. However, it’s not always easy

finding skilled employees. A recent NASSCOM release indicated a growing chasm between the demand for people proficient in programming languages like Quark and XML and the number available.

For Datamatics Technologies (DTL), revenue from the content vertical – which includes the publishing vertical – has risen from Rs 389.93 million in FY04 to Rs 636.89 million in FY05. Lionbridge Technologies, a $ 400 million company that set up Mentorix

– its publishing outsourcing platform in India in 2003 – says the international market for e-learning is expected to grow to from $ 6-7 billion today to $ 20 billion by 2008-09.

The attrition in this industry is also high. There are a few innovative ways of handling this. Datamatics, for instance, pre-empted the labour shortage and distributed its workforce across geographies. Out of a 2000-strong workforce, almost 50 per cent are part-time home workers.

Financials

DTL is one of the largest non voice BPO company based out of India. The company was highly profitable till 2003-04, but its operating margins have suffered ever since it acquired CorPay in US.

The consolidated sales for 9months in FY 2005-06 was 101.4 Crs. The annualized sales for FY2005-06 are projected to be 141Crs. The Content Management Vertical has been growing at over 40% annualized over the last three years and has contributed to 50% of the companies revenues in FY2005-06 and is expected to contribute almost 55% of the revenues in FY2006-07. The companies revenues are expected to grow by 28% to over 180 Crs in 2006-07.

As per the 2004-05 Balance Sheet, the company has over 99 Crs invested in Debt Mutual funds as on 31 Mar 2005. This along with the cash in hand and accruals over the last 12 months have resulted in cash and cash equivalent of Rs 30 per share as on

date.

The company has recently sold its 20% stake in KGL to Cadmus Knowledgeworks International Ltd, Mauritius for Rs 7 Crs. This will result in a capital gain of over Rs 4.5 cr and also improve the consolidated operating margins of the company as KGL was making operational losses.

The EPS is expected to increase from Rs 3.62 for FY2005-06 to 5.16 for FY2006-07 – a growth of over 42%. The company is focusing on mining its existing clients and rationalizing the costs in the US Operations, which will help reduce the SG&A costs and improve the margins over the next one year.

The company is only listed non voice BPO company and has grown at over 50% between 1999 & 2004. It lost this momentum post the CorPay acquisition, and is now focusing in managing the US costs. With over Rs 30 in cash & cash equivalents, it is trading at an adjusted PE of 9 for FY2005-06 & 7 for FY 2006-07. It is one of the cheapest share in the fast growing BPO & KPO space.

Given the good prospects of the Content Management & KPO industry & the efforts made by the company to improve its margins.

from Rajiv Handa