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Krishnan Thiagarajan

THE Digital GlobalSoft (Digital) stock has witnessed some weakness over the past seven trading days. The stock recorded a 9.5 per cent decline in value during this period. This is attributed mainly to the rumours swirling in the market that HP, Digital's parent and its largest client, is likely to cut billing rates. For the third quarter ended December 31, 2002, HP accounted for nearly 77 per cent of Digital's revenues.

Second, Digital remains exposed to the possibility of a full or part merger with HP-ISO (India Software Operations), an 100 per cent unlisted subsidiary of HP in India. In end-January, the Digital management had indicated that the future business and operating structure of the company was under review by a Committee of Independent Directors. While examining the various options for Digital, this Committee took on the responsibility of ensuring that minority shareholder interests would be protected.

When the HP-Compaq merger was consummated at the global level last year, the top management of Digital had reiterated that it would remain a listed entity in the foreseeable future. It also claimed that there were hardly any overlapping businesses between HP-ISO and Digital to integrate these two operations. As these stated positions can no longer be taken for granted, it is clear that uncertain times lie ahead for Digital.

Since the stock fell by nearly 10 per cent over the past seven trading days, it may be prudent to stay invested at these price levels. However, in the light of the uncertainty surrounding the merger, conservative and risk-averse investors may contemplate cutting exposures in small lots on every uptrend.

Financials: After a relatively sluggish second quarter of 2002-03, Digital bounced back with a strong performance in the third quarter ended December 31, 2002. Digital's revenues improved 26 per cent on a year-on-year basis and 16 per cent on a sequential basis to Rs 109.98 crore. Similarly, the post-tax earnings have also jumped 10 per cent on a year-on-year basis and 26 per cent sequentially to Rs 27.01 crore.

In 2002-03 third quarter, Digital managed to improve both its non-HP related revenues and contribution from offshore projects.

The non-HP revenues jumped to 23 per cent of its total revenues in this quarter, from 13 per cent in the corresponding previous period.

During the same period, offshore contribution improved to 37 per cent from 32 per cent in the same period last year. Despite these improvements, the high client concentration (77 per cent of revenues from HP) and onsite exposure (63 per cent) remain a cause for concern.

The recent speculation about possible pressures on billing rates from HP springs from this dependence on a single client.

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