A Profitable Transaction

Over the last couple of years Citicorp Securities has metamorphosed into a transaction processing company from a pure non-banking finance company (NBFC). It now provides a range of services in areas of banking and finance to Citigroup entities in countries such as India, Sri Lanka and Bangladesh. But the long term goal of the company is to cater to the Citibank locations in English speaking regions world wide.

Nascent Industry

The domestic transaction processing industry is still at a nascent stage with very few big players focused exclusively on this business. The transaction processing service depends highly on telecommunication and power infrastructure where India still does not match upto global standards. And despite the fact that the country has made significant progress in these industries, developed countries offer superior and secure infrastructure making it difficult for Indian companies to compete globally. Further, this industry is technology driven and hence faces process obsolesence risk. Add to this, the fact that Indian companies are yet to establish their credibility internationally as a producers of quality goods and services makes the task even more difficult. However, despite the infrastructural constraints, with its large pool of well qualified English speaking population, India is still an attractive centre for providing such services.

 

Early start

Drawing on the English speaking pool of talent, Citicorp is phasing out its NBFC activities and is focusing on transaction processing alone. Transaction Processing Services, started last year, now contribute a substantial portion of the revenues. Though, the company still operates as an NBFC, its share in total revenues was only about 30 per cent in June 99. It is expected to decline further over time. By the end of this fiscal (June 2000), transaction processing is likely to contribute nearly 90 per cent of the total revenue as the company plans to provide transaction service across various domains and derive stable source of revenue.

Global ambitions

The growth in revenue would also come from transaction business from other Citibank locations worldwide. The company is already said to be carrying out pilot projects for Citibank in Czech Republic currently. Analysts says that the size of back office operations at Citi bank itself is large enough for the company to capture and grow. However, it will have to penetrate into Far-east and Europe to keep up its growth momentum.

But there is a hurdle in procuring global business in that transaction processing being a crirtical part of the financial services business as a whole, Citicorp may find it difficult to convince other Citibank locations to transfer their business to it. Also, in the long run, Citicorp will need to tap other banks and finance companies to sustain revenue growth and improve its profitability. For margins of the company may also be impacted adversely if it caters only to Citi group of companies. But that is a minor concern for the business is largely volume driven, only topline growth will enhance earnings. Hence, Analysts say, growth will have to be driven by new business as there is limited scope for growth in its existing markets in which Citicorp operates.

Good results

But for now there seems to be no problem. In the first three quarters of this fiscal, the company has recorded a topline growth of 223 per cent to Rs 29.49 crore compared to Rs 9.13 crore in the corresponding previous period. In the same period net profit has gone up from Rs 1.61 crore to Rs 1.79 crore. But operating margin has come down considerably to 27 per cent from 43 per cent in the previous period mainly on account of increased expenditure on account of establishing new line of business. Net margin has also declined from 18 per cent to six per cent because of high tax provisions on account of previous years' leasing activities. The provision for tax is likely to be high till half of next year. The company is expected to achieve sales of Rs 45 crore by FY 2001. Earnings is likely to grow to Rs 3.5 crore during the same period.

Long term winner

If the company is successful in procuring business from key Citibank locations and a few other big banks, the growth could be explosive. Citicorp Securities is the only listed company in this business and added to that the backing of Citibank makes it a good investment. The stock has taken a beating after SEBI announced the shifting of stock to rolling settlement mode. Since then volume in the stock has gone down substantially and the price has depreciated . This makes the stock a good medium to long term bet at the current price of Rs 204.