Not Happening Jaldi

The KLG Systel scrip may look cheap but the bottomline shows no signs of improving

KLG Systel is into e-commerce providing life-cycle software and e-commerce solutions to a cross section of organisations. The company has recently launched an Internet-based e-commerce product 24x7INABOX in New Zealand and Australia targeting the small and medium enterprises. Its scrip is currently being traded at a price earnings multiple (PE) of only 2.3.

"The business environment is changing fast from mass production to mass customisation," says Kumud Goel, managing director, KLG Systel. That requires an organisation to have a flexible shopfloor and a flexible system throughout to respond to the changing market condition.

 

KLG integrates the entire functions of an orgainsation starting with demand projection system at the apex to the shopfloor at the bottom.

The company provides Internet solutions to integrate resource procurement, delivery and customer relationship.

KLG's business is divided into different strategic business units (SBU). These include computer aided design/ engineering (CAD/ CAE), project management, manufacturing systems division (MSD) and e-commerce.

CAD/ CAE : This is the largest SBU contributing around 30 per cent of the revenue. The two main focus areas here are design and engineering analysis and electrical CAD/ CAE.

The company develops and integrates software products, solutions and services from leading international companies like Auto Desk Coade Inc, and Rebis Inc to meet specific customer requirements in both the domestic and international markets.

In the field of design and engineering analysis, the company provides solutions like process and organisation simulation, piping, electricals and instrumentations.

The customer list in this field includes Bharat Heavy Electricals (BHEL), National Thermal Power Corporation (NTPC), Larsen & Toubro and Tata Steel.

The company provides solutions for power system network design and analysis for electrical CAD/ CAE. Here, the company optimises power distribution systems by providing various types of analyses for companies like BHEL, Indian Oil Corporation (IOC - Baroda Refinery), Engineers India and L&T.

In this segment, KLG mainly faces competition from the companies it collaborates to provide solutions to its clients.

Project management : KLG's project management business constitutes around 20 per cent of the total revenue. The services offered by the company include project cost estimation, project management for design, procurement and construction and risk analysis.

The company sources required technologies from Primavera Systems Inc, Timberline Software Corporation and Icarus. The company does not see any major competitor in this segment. BHEL, EIL, Punjab Lloyd and NTPC are a few major customers.

MSD : The manufacturing system division includes supply chain solutions and manufacturing execution systems. Supply chain solutions deal with problems like demand prediction and distribution management.

The manufacturing execution systems involves linking enterprise resource planning (ERP) and business systems with the plant and shopfloors in order to keep the entire system flexible.

KLG's major competitor in this segment is I2. The customer list includes RIL, L&T, IPCL and ITC. New Zealand-based Woolworths supermarket chain is the major cross-boarder customer for KLG in this segment.

It has 83 stores across New Zealand with a significant presence across the Asia Pacific through its holding company Dairy Farms International, Hong Kong.

E-commerce : The SBU contributed about 31 per cent of KLG's revenue for 2000. In the business-to-consumer (B2C) segment, KLG has Jaldi.com, an e-tailing site, owned by Jaldi E Commerce Ltd, a 100 per cent subsidiary of KLG.

In the business-to-business (B2B) segment, the company has two portals -- EPCAsia.com and EPCPlanet.com. They are targetted at organisations, involved in the business of engineering, procurement and construction.

So far, their contribution to the topline has been nil. KLG is still working on the two B2B portals. The company launched an e-commerce product --Jaldi-In-A-Box (JIB) in India in the last calendar year.

JIB is an unique software system that lets users set up their own e-commerce enabled shopping site on the Internet for around Rs 10,000. It is easy to use without any help from software professionals.

KLG has recently launched its international version '24X7INABOX' in New Zealand and Australia. The company has tied up with MECS New Zealand, for launching '24x7INABOX'.

Concerns

The ongoing industrial slowdown is a major concern for KLG. Being in a service industry, the company may face a difficult time. The company plans to make a foray into West Asia and the US. During the first half of the calendar 2000, the company failed to acquire the US-based Engineering Physics Software Inc (Coade) due to litigation problems.

At present, it may be difficult for the company to enter the US market owing to the slowdown. The company plans to enter the Middle East market through Dubai Internet City, opened recently.

Then, Jaldi.com is a drain on the company. The management is optimistic and says it has no plans to sell off the portal. Similarly, the prospects of the B2B portals as revenue earners are also questionable.

Following the dot.com debacle, there were hardly any takers for Jaldi-In-A-Box despite its low cost.

Outlook

"The calendar year 2000 has been a period of consolidation for KLG Systel," says Goel. The company becomes zero debt during the year. It registered a topline growth of around six per cent.

Huge other income from investments in bonds of financial institutions jacked up the net profit by around 124 per cent over the year. "The actual business growth is from Rs 2.86 crore (in the last year) to Rs 3.21 crore (12 per cent)," adds Goel.

The first quarter results of the company show a decline in net profit by 18 per cent against a moderate five per cent increase in revenues over the last year. That clearly shows a decrease in profitability over the period.

The company has been maintaining a 15 per cent dividend against the face value of Rs 10 per share since 1998. The scrip is at present traded in the rolling settlement segment at around Rs 35 and a price earning multiple (PE) of 2.3. A PE of 2.3 seems to be dirt cheap but at the same time, we don't see any notable step that can significantly boost the bottomline. Investors could do well to stay away.