The Hindu Business Line : Macmillan: Buy

INVESTORS with a long-term investment horizon can consider taking exposure to the Macmillan India stock. At the current price of Rs 470, the stock trades at a multiple of 17 times its 2004 (year-ended December) per share earnings and 13 times its expected FY-05 earnings.

The company's ability to synchronise the advent of Internet and business process outsourcing with its strong domain knowledge and technical capabilities in the publishing space lends optimism to its earnings growth. Global outsourcing opportunities and continued support from the parent company in the UK are expected to drive growth.

Information processing hub

Macmillan has come a long way, from an old economy publisher of English language educational books to a high-end business process outsourcing hub for complex typesetting and data conversion services for international customers.

The company's Information Processing Division (IPD) in Bangalore (a 100 per cent EoU) offers data digitisation services, online editing, electronic coding and conversion. The typesetting and information processing division contributed 62 per cent to the total revenue in FY-04. The revenues in this segment jumped 32 per cent over the previous year and substantiate the segment's role as a key growth driver. The division not only managed to expand its client base in the US and Europe but also offer services enabled by information technology.

Carrying on its traditional business, Macmillan continues its thrust on low-cost education and general books. It plans to cater to State boards syllabi apart from publishing books for CBSE and ICSE boards. This will help sustain its revenue flows from the traditional book-publishing segment.

Expansion mode

Taking advantage of its cash-rich position, Macmillan has been on the lookout for acquisitions in the publishing and BPO areas to fit into its strategy of building verticals. The recent acquisition of the Chennai-based typesetting company, Charon Tech, seems to augur well with its growth strategy. The company expects $3 million (about Rs 13 crore) in revenues from this acquisition in FY-06. It has been able to leverage its strong domain knowledge in publishing and digitisation services through a new subsidiary, MPS Technologies, which provides high-end software products for publishers.

Business diversification

The scientific publishing arm of Macmillan offers exclusive service in publishing science journals and is expected to earn $4 million (about Rs 17 crore) in FY-05.

E-Macmillan, which offers web-based solutions for virtual education, contributed only 4 per cent towards revenue in the last fiscal. It has nevertheless made a headstart and can be expected to grow with the virtual education programmes catching on in the country.

Financials

In FY-04, Macmillan's sales rose 24 per cent to Rs 126 crore and post-tax earnings surged 40 per cent to Rs 43.37 crore. The operating profit margin stood at 37 per cent and margins have been in this range for the past three years. This reflects the company's ability to withstand competition and combat copyright infringement. It remains a zero-debt company.

Of the total subscribed share capital, 61 per cent is held by holding company Holtzbrinck of the UK and about 20 per cent by foreign institutional investors and trusts. The key risks associated with this stock are downward pressure on price due to rising competition and a relatively low floating stock. The company has, however, managed to mitigate the price risk through increased volumes.

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