Flying High

Kale Consultants has repositioned itself to tap the opportunity in the airlines industry, but its business from the banking domain has slipped

Despite tough market conditions, Pune-based Kale Consultants has managed to wipe off the red from its books in fiscal 2002. The company reported net profit of Rs 2.04 crore in FY02, compared with a net loss of Rs 67 lakh in the previous year.

In the past couple of years, Kale's performance had been marred by the management's efforts to reposition itself as a product-driven company, rather than depend on the plain-vanilla package implementation and software maintenance business for a substantial portion of its revenues. In line with this strategy, the company invested heavily in developing and acquiring products and intellectual property rights (IPRs).

It spent Rs 10.7 crore on building a product portfolio in FY01 -- through in-house development and by products acquired from other companies -- against net sales of Rs 34.56 crore. It all began with the acquisition of three cargo systems: CSP, a cargo operating system; Amber, a cargo revenue accounting system; and Mercury, a cargo ground-handling system from Speedwing, the independent operating division of British Airways in July 2000. This year, the company has earmarked Rs 5 crore on research & development activities.

"We have benefited from the product-led, industry-focused business model," says Vipul Jain, managing director, Kale Consultants.

Moreover, the company has successfully leveraged its domain expertise in the airlines industry by foraying into the high-growth business process outsourcing (BPO) segment. It set up an airlines processing centre (APC) in the last fiscal, with Qatar Airways as the first customer. Kale already has a staff strength of 104 professionals at the APC, catering to three airlines customers.

Growth drivers: In addition to the growth from BPO activities, the company expects the cargo solutions and business intelligence products to drive growth over the next few years. With trade barriers falling across the world, cargo operations has emerged as one of the fastest growing segments in the airlines industry; it's estimated to grow by over 10 per cent in the next three years. Many airlines are still functioning on legacy systems that are 10-15 years old, opening up opportunities worth about $800 mn (Rs 3,850 crore).

The company is also optimistic about its business intelligence product , CEO Cockpit, which has been developed in collaboration with IATA (International Air Transport Association), the apex international organisation of the airlines and travel industry. "We have already developed a prototype. Now, we intend to attract early adopters who will be customers and will also help us further develop the product," explains Jain.

Financials: The topline growth of 43 per cent to Rs 49.53 crore was largely driven by the 157 per cent jump in revenues from airlines industry domain. On the other hand, contribution from the banking segment has declined considerably -- below 30 per cent from 37 per cent of turnover in FY01.

The shift towards the airlines business from sub-contracted work in the banking sphere is also clearly visible from the sharp decline in software professionals employed by the company: it has fallen drastically from 452 to 372 employees in the past one year. Analysts expect this business could suffer further with the merger of Polaris Software and Orbitech Solutions. The company currently has around 80 billable software professionals sub-contracted with Orbitech.

The loss of this business is seen as one of the key issues that could hurt Kale's growth in this fiscal. Although the company claims that there are no indications of any adverse impact from the merger, Kale seems to have factored in the same into its conservative guidance of 20 per cent topline growth (to Rs 60 crore) in this fiscal.

Considering that net sales was Rs 15.2 crore in the fourth quarter, this essentially means that the company expects sequential growth to be flat in every quarter of FY03. On the other hand, net profit is projected to vault by 140 per cent to Rs 5 crore.

Valuations: At the current price of Rs 71.1 the scrip trades 16.3 times its projected FY03 earnings, and the valuation appears to be quite stretched. More so when you consider the fact that better stocks like Satyam Computers, HCL Technologies, and Polaris Software are trading at a forward discounting of around or below 15 times their FY03 earnings. We would advice investors to pare exposure to the stock.