Datamatics Global Services

The company is engaged in building intelligent solutions for data-driven businesses to enhance their productivity and customer experience. From FY23 the company has reclassified its business into three segments, namely, digital technologies, digital operations and digital experiences, all of which are contributing well to its revenues.

The results’ season always springs positive surprises about some companies and this quickly gets reflected in their share prices. We are now at the conclusion of the March quarter result season and have witnessed some sectors and companies beating analysts’ expectations. Datamatics Global Services (DGS) is one such company that has announced a superb set of results for the quarter ending March 2013. Post this result the shares of the company have jumped by almost 50 per cent. This puts an investor into a quandary about whether he should take exposure in the counter due to the exceptional results or waitfor an appropriate time for the stock to settle down from its sudden high.

About the Company

To arrive at any decision, we first need to understand the company and its business fundamentals. DGS is engaged in building intelligent solutions for data-driven businesses to enhance their productivity and customer experience. From FY23 the company has reclassified its business into three segments: digital technologies, digital operations and digital experiences.

1) Digital Technologies - Digital technologies include application modernisation, cloud and DevOps, artificial intelligence and cognitive services, automatic fare collection, intelligent automation mobility and portals’ business solutions and platforms, among others. This segment contributed 41 per cent to the company’s total revenue and for Q4FY23 it posted revenue of Rs170 crore with EBIT margin of 9.1 per cent. 

The revenue saw an increase of 29.4 per cent on a yearly basis while on a sequential basis it increased by 6.8 per cent. The margin too saw an improvement of 445 basis points on a yearly basis and jumped almost double to 9.1 per cent. This segment will further be helped by growth in IT since the overall IT spending is estimated to grow at CAGR of 5 per cent to USD 5.3 trillion in 2025. The intelligent process automation market is growing at CAGR of 20-25 per cent and is estimated to reach USD 12 billion in 2025.
 

2) Digital Experiences -Customer management and experience, digital proctoring and consumer research and analytics are included in the services provided under this segment which contributed 14 per cent to the revenue in Q4FY23 and saw a growth of 48.8 per cent on a yearly basis. The margin from this segment for Q4FY23 was 28.2 per cent, which was up by 1,126 basis points on a yearly basis. According to Everest Group, the digital experiences’ market is estimated to grow at CAGR of 14 per cent to reach USD 160 billion in 2025.
 

3) Digital Operations -Finance and accounting, banking process management, insurance process management and digital content management are part of digital operations that contributed 45 per cent to the revenue for Q4FY23 and posted revenue of Rs 187 crore for Q4FY23. There was an improvement of 232 basis points in the margin from this segment on a yearly basis to 23 per cent. 
 

The company serves over 300 clients globally and offers digital solutions across banking and financial services, insurance, healthcare, manufacturing, and media and publishing sectors. It has a strong footprint in the digital space providing new-age solutions in cloud, mobility, robotics, digital process automation and artificial intelligence. The company also has a strong product portfolio in robotic process automation, intelligent document processing, business intelligence and advance analytics, artificial intelligence and automated fare collection. It has developed its own IP solutions in the digital technology space.
 

DGS’ Intelligent Automation Platform (IAP) is its unified platform to automate a series of tasks, processes and unstructured and semi-structured data in documents. The IAP comprises robotic process automation (TruBot), intelligent document processing (TruCap+), AI and ML models (TruAI) and Business Intelligence (TruBI). These products can be deployed together or can be used as standalone products. The products are commercially licensed to various enterprises across financial services, logistics, manufacturing, banking and insurance. The company also has in its product portfolio a product called automatic fare collection (AFC) while smart gates and contactless gates have been among its key focus areas.
 

Attractive Features

The company is investing in developing and updating its IP solutions in the digital technology space and in optimising its IAP. Besides, it is also keeping its focus on AFC, which has a huge opportunity in the US and other emerging economies around the world, including India. It has installed an AFC system in Phase 1 for Mumbai Metro that is in operation. The company has also made significant progress in installing AFC in Phase 2 of Mumbai Metro and Memphis Area Transit Authority (MATA), the public transportation provider for Memphis area in the US. 

The company has recently won a few AFC contracts, including one for Delhi–Meerut RRTS corridor by the National Capital Region Transport Corporation and another one for Kolkata Metro by Rail Vikas Nigam Limited. Looking at the strong business fundamentals, credit rating agency ICRA has upgraded the ratings of this company A+ and A1+. The rating reaffirmation favourably factors in DGS’ steady financial performance, as demonstrated by its steady revenue growth, healthy cash accruals and strong liquidity profile in terms of unencumbered cash and liquid investments of around ₹498 crore as on March 31, 2023. 

Moreover, healthy internal accrual generation has continued to result in minimal reliance on debt, translating into a comfortable capital structure and robust debt protection metrics. The company’s addition of new clients remains strong and during the last quarter it has added 21 new clients (Q4FY23). The company is also actively looking at acquisitions and currently it is in dialogue with some organisations. DGS is planning to utilise some funds for merger and acquisition activities. What is interesting to note is that the company has been doing well in all the three segments which individually or together can help provide the right packages to its clients.

Financial Performance

For the year ended FY23 the company reported consolidated revenue of ₹1,459 crore, which grew by 21.5 per cent YoY from ₹1,227 crore. All the three segments of the company demonstrated growth. However, digital operations saw the best growth in absolute numbers while the digital experiences’ segment saw best growth of 39 per cent in percentage terms. This segment also saw the best improvement in EBIT margins which improved from 14.7 per cent in FY22 to 26.4 per cent in FY23. 

Financial Performance For the year ended FY23 the company reported consolidated revenue of ₹1,459 crore, which grew by 21.5 per cent YoY from ₹1,227 crore. All the three segments of the company demonstrated growth. However, digital operations saw the best growth in absolute numbers while the digital experiences’ segment saw best growth of 39 per cent in percentage terms. This segment also saw the best improvement in EBIT margins which improved from 14.7 per cent in FY22 to 26.4 per cent in FY23. 

 

Valuation and Outlook

While the shares of the company have gained from ₹300 to ₹450 in less than a fortnight, we believe that the momentum is now a bit stretched. In terms of valuation, the shares are trading at a price-to-earnings (PE) ratio of 14.6 times, whereas the median PE for the past five years stood at 9.9 times. Despite the increase in the share price, when compared to the company's growth, the valuation seems reasonable. The PE-to-growth ratio of the shares is less than one, making them attractive.

According to the investor presentation, a US-based multinational company has chosen Datamatics' intelligent automation platform to automate its data collection process. The company also serves leading pharmaceutical, stockbroking, financial services, and private bank clients to meet their respective requirements. Additionally, the company has a healthy order book as a result of multiple key deal wins in Q4FY23, and it has the potential to grow further given the notable growth in all business segments.

With cash and cash equivalents of almost one-fifth of the company's market capitalization, the management is expecting to take the inorganic route to growth. Looking at the growth in revenues, improving margins, and strong balance sheet, we believe that long-term investors with an investment horizon of more than three years can invest in a staggered manner, given the stock's massive movement in recent times. Therefore, we recommend a BUY.