PSI Data Systems: Boosted by smart alliances

Recommendation: Hold

Krishnan Thiagarajan

WITH a strong parent in Groupe Bull, right focus areas and good business mix, a broadbased geographic presence, a web of healthy strategic alliances and partnerships and sound financials, PSI Data Systems represents a good entry point for investors with a medium-term perspective.

At the current market price of Rs. 975, the stock is trading at a price earnings multiple of 46 times its annualised 2000 earnings.

The passage of the Information Technology Bill, 1999 by both Houses of Parliament may be a significant growth driver for PSI Data Systems. After the turnaround in PSI Data's fortunes in 1998, Groupe Bull of France introduced a slew of high-profile products in the Indian market.

In this new world of electronic commerce, banks and FIs will be among the first to exploit the opportunity thrown up by the IT Bill in the field of online banking in India. Since the fortunes of the smart card market are closely aligned to electronic commerce, the early introduction of smart cards by PSI Data puts it in an ideal position to capitalise on this burgeoning opportunity.

As Groupe Bull of France has been at the vanguard of the smart card revolution in Europe, PSI Data is well entrenched to leverage on the technical support from its parent to exploit the emerging opportunity. Groupe Bull has also recently launched OpenMaster -- its premium enterprise management software in the Indian market, in order to exploit the growing enterprise management software market in the country.

PSI Data has chalked out a clearly defined strategy of targeting specific niches in the domestic and international markets. For PSI, the domestic market accounted for around 26 per cent of its revenues in 1999.

In this market, it is combining Bull's expertise in banking and payment systems, network management solutions and security products with its own strength in software solutions for total branch automation, foreign exchange and trade finance operations in banks and financial services. To reinforce its domain expertise in the financial services segment, PSI Data has been recently appointed consultant by the Bombay Stock Exchange to evaluate and define parameters for BSE's upcoming initiative to offer IPO's shares online.

In the international markets, PSI Data continues to offer a mix of offshore software development and onsite assignments in the area of e-commerce, Internet technologies and related applications. To strengthen its domestic and international expertise, it has entered into a series of strategic alliances and partnerships.

The company has entered into a joint venture with a UK-based start-up company called Accelerex with a 20 per cent equity stake. In addition, recently, it has taken up a 10 per cent equity stake in the UK-based Advisor Technology. Accelerex has a 50 per cent stake in Advisor Technology. Advisor Technology aims to focus on promoting Security Advisor, a PSI-developed software package that offers security on the Internet by, say, providing early warning signals of attack on a company website.

So far, PSI Data has only been partially successful in its attempt to make a conscious shift in its software development revenues from onsite to offshore development. An increase in offshore component is accompanied by an increase in operating profit margins.

In 1998, the contribution of offshore development increased to 16 per cent from 9 per cent the previous year, with an improvement in the operating profit margins (OPM) by nearly 9.2 percentage points. But in 1999, the offshore component of the total revenues of PSI Data crawled up only to 19 per cent and operating profit margins improved by 2.17 per cent to 21.3 per cent.

This is largely on account of the contribution from the US remaining flat at around 32 per cent in 1999 vis-a-vis 33 per cent in 1998, with the company undertaking all its projects onsite. Its future growth profile will also depend largely on its ability to shift some of the US business offshore and its ability to improve margins as a consequence.

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Besides, the broadbased geographic reach insulates the company from dependence on any particular geographic region for its revenues. In 1998, PSI Data reduced the contribution of revenues from the US from 45 per cent to 33 per cent in 1998, with a corresponding improvement in contribution from Europe. In the following year, the company maintained this balanced regional mix, with contributions from the US and Europe declining only to 32 per cent and 42 per cent respectively. This confers on it a unique earnings stream that is different from all its software peers.