Selling In Disguise
In October 1998, we had recommended Ramco at Rs 700 level. The scrip then went up to Rs 1,000 and is currently trading at Rs 800. After the spin-off has become official, the scrip holds good potential at current price. Ramco will separate its software division into Ramco Systems and shareholders will get one sharein the new company for every share held.
The systems division turned profitable only in the fourth quarter last year. Its cement fibre business is a cash cow. The textile business though small in size has excellent margins at the operating levels and is a foreign exchange earner for the company. A look at the businesses.
Ramco Industries: In cement fibre, Ramco makes `Ramco' fibre cement roofing sheets, flat sheets, fibre cement pressure pipes, roofing accessories, irrigation and rainwater pipes and fittings. It has a 13 per cent market share in asbestos cement sheets. To increase its market share, it has expanded its capacity by building new plants. It has set up a facility at Silvassa with a capacity of 45,000 tonne per annum at a cost of Rs 15 crore last year. This plant should help it service large markets in the west and north. This plant will yield benefits to the company from the current year onwards.
The company is planning to increase its presence in Sri Lanka and is setting up a greenfield sheeting plant in Colombo with a capacity of 36,000 tonnes at Rs 16 crore. With the expansion more or less completed the margins and the returns for the company will start improving.
In order to mitigate the effect of the vagaries of the asbestos business, Ramco had diversified into textiles and software. It has a 100 per cent export oriented cotton yarn unit. Though last year cotton yarn exports have come down from Rs 23.03 crore in 1996-97 to Rs 20.01 crore, realisations have improved. This is primarily due to increased orders for finer counts of cotton and cost control. Global competition has increased due to the Asian crisis.
Ramco Systems: Ramco Systems is by far the only known ERP major from Asia and competes with SAP, Baan and Peoplesoft globally. It is the only software company from India to have an internationally branded product. Its brand Marshal has started to show results with sales growing 78.12 per cent last year to Rs 71 crore. The main growth has come from India and the US. Ramco has invested around Rs 150 crore in the last five years in the form of development, fixed assets and capital investments in subsidiaries abroad for Marshal and it amortised Rs 20 crore as deferred revenue expenditure in 1997-98. If the company maintains the same level of growth it would be able to wipe out its accumulated loses of around Rs 60 crore in less than three years, says an analyst.
It has set a target of achieving a sales turnover of Rs 170 crore this year. Analysts expect the company to post an 80 per cent growth in the next three years. Assuming a conservative OPM of 20 per cent, it will post an operating profit of Rs 34 crore. It will be able to post a net profit of at least Rs 15 crore and on an equity of Rs 4.30 crore, it will result in an EPS of 34.88.
The split will result in improved valuations for Ramco Industries too. Cement fibre is a cash cow and textile is looking up. The returns from Ramco Systems will be good as valuations will definitely improve after it turned profitable. This spin-off is a double whammy for shareholders. At current levels, the scrip continues to looks attractive. or=black face=arial size=2>
Since the IBM proposals for stake acquisitions in its Indian joint ventures are based on a mutually agreeable deal worked out by the partners, they are not expected to face any approval problem at the FIPB level.
As a precursor to this realignments, US computer giant IBM had decided to forge strategic alliances with Indian software companies to help them market their proprietary products worldwide through the IBM channel.
In a unique marketing arrangement, IBM, through Tata-IBM Ltd, had decided to spend up to 18 per cent of the projected sales of the new applications on the promotional expenses to market and distribute the wares.
The Big Blue plans to forge eight such alliances by the end of this year and will spend part of its worldwide $300 million budget earmarked for solution developer marketing (SDM).
In a recent interview to this newspaper, Tata-IBM vice-president (software & solution developer marketing), V Padmanabhan, had said, "Along with the company we select, we'll co-invest in the marketing and distribution of an application which has a worldwide market in the ratio of 1:1, up to 18 per cent of the sales projection of the product."
Under the SDM scheme, four companies, including Indus Software whose application LSI would be launched in Australia and the US in July `99, have already been selected.
The sales projection of LSI for the Australia and India is about $4 million.
The SDM scheme is aimed at developing proprietary software. IBM will test it, certify it and then put in on the IBM channel worldwide.