Mindteck (India) -- Well-embedded

Recommendation: Hold

Krishnan Thiagarajan

AT the current market price of Rs. 133, the Mindteck stock has slipped sharply from the high of Rs. 502 in the first quarter of 2000.

But shareholders with a medium-term perspective can stay invested. However, fresh investments may be contemplated after the announcement of the 1999-2000 earnings performance. In any case, keeping a watch on the growth prospects of the Global Mindteck Group will hold the key to Mindteck (India)'s future.

Healthy prospects: The Global Mindteck Group is expected to achieve a turnover of $20 millions (Rs. 87 crores) by June 2000. Though this projection appears optimistic, the long-term potential for growth of the group as a whole is healthy. Since the company will serve as the outsourcing partner of the Global Mindteck Group, a significant chunk of the future business is expected to accrue to Mindteck (India). With three development centres, it appears well placed to do outsourcing work for the Global Mindteck Group. Even otherwise, the key focus area of the Mindteck (India) is embedded software, in which India is likely to play a major role. Both the factors augur well for the company's growth.

Change in control: Mindteck (India), in its new avatar, is still in the process of finding its bearings in the core business of software development and consulting. It is more than a year since a negotiated deal was put through by Embtech Holdings, Mauritius, Ind Asia Ventures and Mr. Darius Pandole to acquire a 65 per cent equity stake from the promoters of Hinditron Informatics at Rs. 8 per share.

Through this acquisition, TAIB Bank established a controlling stake in the venture. Following this, an open offer was made for acquiring an additional 20 per cent equity stake at Rs. 8 per share. Considering the relatively unattractive price, the long presence in the software development business and the proposed capital reduction programme, only 1.76 per cent of the shareholders (out of the 20 per cent) tendered to the offer.

Hardware to software: Though Hinditron Informatics was initially engaged in making and distributing medical equipment, graphic software and products, at the time of the acquisition it was focussed entirely in the business of software development. With three software development centres at Bangalore, SEEPZ, (Mumbai) and Calcutta, it had adequate infrastructure to offer software development services.

Capital reduction: Since the completion of the formalities of this offer in January 1999, a couple of developments have strengthened the fundamentals of this acquisition. One, the Bombay High Court approved the capital reduction programme in August 1999 which reduced the equity capital of Hinditron Informatics from Rs. 20 crores to Rs. 5 crores and improved the free reserves by Rs. 1.71 crores.

According to the capital reduction programme, the face value of the shares was reduced from Rs. 10 to Rs. 2.50 per share. After consolidation, the shareholders of Hinditron Informatics were offered four fully-paid shares, post-capital reduction, for one share held prior to capital reduction.

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On the last day before the capital reduction, the stock, which was trading at Rs. 28.20, was listed again on a high note at Rs. 244.85 on November 15, 1999. Consequent to this approval, the company's name was also changed from Hinditron Informatics to Mindteck (India) with effect from September 15, 1999.

Mindware linkage: Second, after the acquisition of Hinditron Informatics, TAIB Bank also acquired the entire equity stake in Mindware -- the software consulting arm of the Pertech Computers group. Mindware now has presence in the US, the UK, Japan and Singapore. Using these two acquisitions as a plank, TAIB Bank as strategic investor has created the Mindteck group.

The Global Mindteck Group consists mainly of Mindware and Mindteck (India). The acquisition of Mindware has not only lent the IT consulting strength, say, in the area of e-commerce, but also paved the way for all the outsourcing work to Mindteck (India) to be undertaken by its software development centres in India. Besides this, Mindteck (India) is honing its expertise in the embedded software arena, one of the high growth areas in the IT industry in future.

Financials: For the first nine months of 1999-2000, the company recorded revenues of Rs. 3.51 crores and losses of Rs. 0.36 crore. Nearly 90-95 per cent of the revenues were derived from exports of software engineering services. Unlike revenues which improved steadily from quarter to quarter, the company recorded losses in the first two quarters of 1999-2000.

After making losses of Rs. 0.10 crore (after providing for Rs. 0.03 crore towards reorganisation costs in the quarter) and Rs. 0.41 crore in the first two quarters, it progressed into the positive territory in the third quarter, with profits of Rs. 0.15 crore. Although the operating profit margins of 12.57 per cent in the third quarter were significantly lower than the industry average, it exhibited the first encouraging sign of a turnaround in the fortunes of the company.