Communicating Positive Signals
Pentafour Communications (PCL) is one scrip which has beaten the bearish market and the slowdown. It belongs to the renowned south based Pentafour group, which holds 70 per cent stake in the company. At the current price of Rs 97 and an EPS of Rs 13.3 it is discounted less than 10 times. A number of unknown software companies are quoted at a P/E multiple of more than 25. Even considering its first quarter results, the stock is going cheap. Buy at current levels.
PCL has four business divisions - education & training, hardware and systems integration, project and software development (PSD) and services.
The PSD division is into system integration, hardware, software and networking. PCL is also developing communication related software, providing onsite and offshore jobs. PCL's PSD division develops software for various industries such as banking, insurance, health care and manufacturing.
The division also provides communication solutions. It carries out turnkey solutions on local area network and wide area network and enterprise networking. Its CAD/CAM /CAE resource center focuses on training, turnkey projects, on-site consulting, product implementation and GIS services.
Inspite of competiton, PCL is still well positioned to compete as it can capitalise on the vast experience of its parent company Pentafour Software Exports (PSEL). Says K.Srinivasan, director, PCL, "Our amibtion is to create a niche in the areas of CAD/CAM/CAE and GIS services both in domestic and international markets." Apart from this, PCL is also involved in high end training. It is also focusing on Y2K testing and providing solutions for the Y2K problem.
PCL provides solutions on special effects, post production and packaged products. It also markets products developed by PSEL.
In 1996-97, PCL earned 47 per cent of its revenue from software related services and the balance came from hardware. In 1997-98 PCL derived 66 per cent of its income from software related services and the balance came from hardware. The change in focus from hardware, communications and services to software will ensure higher growth and margins.
PCL managed to put up a decent performance in tandem with the software industry. Its sales increased by 116 per cent to Rs 40.90 crore during 1997-98 while net profit increased by 94 per cent to Rs 6.78 crore. This was despite a substantial increase in interest burden from Rs 0.12 crore to Rs 1.43 crore. Its first quarter results were even more impressive posting a turnover of Rs 13.16 crore against Rs 8.45 crore the previous quarter. Exports amounted to Rs 3.52 crore.
In order to maintain its growth tempo and capitalise on the software boom PCL has entered into a number of business agreements with Gulf Business Machines, Dubai and Saudi Business Machines for software development and projects. Further, it is opening up an office in US by September 1998 in Detroit, USA for consultancy and projects.
It has already invested Rs 12 crore in infrastructure facilities. Its capex is estimated to be nearly Rs 3 crore in 1998-99.
Further PCL's ability to provide a one stop shop solution for its customers -- from hardware, software, systems integration, education and training to microwave linking, entertainment etc definitely gives it an edge over its competitors.
PCL was also proposed to be merged with PSEL but later the plan was dropped on account of opposition from PSEL's GDR holders. PCL certainly holds a strong growth potential. Its increasing focus on software with less emphasis on hardware will result in better margins and a higher growth rate.