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ONTRACK SYSTEMS LIMITED??????CMP:40.65
Brief Profile of the company:
Ontrack Systems Limited (OSL) is an ISO 9001:2000 certified, offering a wide array of software and networking expertise across industries. Since its inception in the year 1988, it has evolved into a IT and IT Enabled Services (ITES) player. Presently, the company serves global markets.

Its technological prowess lies in its state-of-the-art Managed Service Centre in UK and Global Development Centre in Kolkata and Offshore Development Centre in Fujairah where software, support and integration work can be accomplished at competitive costs.

Ontrack has a skilled and experienced manpower of over 200 IT professionals.
Organization structure:
Three main operations:
1. Ontrack UK: It is a 100% subsidiary and provides about 75-80% of the total business. Three types of services are provided by this subsidiary:
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a. IT-managed Services: 50-55% of total revenue comes from this line of business. There are two large clients - a Fortune 10 corporation and Buchham Ltd. There are a couple of smaller clients too but the bulk of the business comes from these two clients. EBIDTA margins in this division are about 30%.
b. Application Development: It constitutes about 25% of total revenue. About half the professionals are based in the UK and other half in India.
c. Placement Services:
2. Ontrack UAE: It is a 100% subsidiary. It provides Application development services. There are 6-7 employees based in UAE and same number is based in India. This division (subsidiary) provides about 10% of the total business.
3. Indian Operations:
Indian operations constitute the remaining 10-15% of the business.
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a. Ontrack Global: Services offered are ITES/BPO. Currently it is voice-based and the operations are in nascent stage. The company plans to focus on it post January 2006.
b. Hardware Sales and Support: It is a continuation of its legacy business.
c. Portal:
i. Tendertimes.com:
It is the flagship portal of the company. The portal has started generating business. Recently, it has got an order of Rs. 2m from Eastern Railway. The portal will find its significance in e-governance projects too.
ii. IndiaOneStop.com
d. ERP: Ontracks provides end-to-end service on Microsoft?s Navision ERP. The package finds its application with SMEs (Small and Medium enterprises). In FY05, Ontrack was the second largest player in Navision space (behind Price Waterhouse) in East India. This segment provides about 3-4% of company?s business. This division has potential to grow faster than rest of the business.
Future Plans:
1. The company plans to acquire a US based corporation in Q2FY06. This subsidiary could start delivering by Q3FY06. The acquisition would be made on cash and stock basis.
2. The company is in advances stage of talks for acquisitions in UK and continental Europe as well. These are likely to be in FY07 and beyond.
3. On an organic basis, the company plans to grow by 20-25%, while maintaining its margins.
Financials:
On a standalone basis, for FY05, the revenues stood at Rs. 269m up 21%, EBIDTA at Rs. 25m up 17%, and PAT at Rs. 9m up 102%. It translates into an EPS of Rs. 1.90. In 1Q FY06, the revenues stood at Rs. 62m up 14% YoY, EBIDTA at Rs. 10m up 140% YoY, and PAT at Rs 5m up 810%.

For FY06E, we expect the company to clock revenue of Rs. 315m up 17%, EBIDTA of Rs. 36m up 45%, and PAT of Rs. 14m up 47%. This translates into an EPS of Rs. 2.87 on non-diluted equity [the company has already announced 1:2 bonus].

The company is planning a US based acquisition in next 1-2 months. Revenues and profits from this acquisition will start flowing from Q3 onwards. The company is also planning a UK-based acquisition in FY07. The revenue and profitability from the acquisitions is not factored into our projections. Further, the company has guided for 20-25% growth in sales and profit in FY07. On consolidated basis, for FY05, the revenues stood at Rs. 279m and PAT at Rs. 16m. This translates into a fully diluted EPS of Rs. 3.24 (EPS of Rs 1.34 from the subsidiaries). Assuming 10% growth in subsidiary businesses, we expect EPS from subsidiaries to be Rs. 1.47 for FY06E. So, for consolidated entity, for FY06E, we expect an EPS of Rs. 4.34 (on pre-bonus equity).

The company has given 1:2 bonus in 2Q FY06, because of which no. of shares will go upto 7.5m. Towards the end of FY06 or FY07, the company is likely to come out with a rights-cum-public issue (assumed in FY07 in our model), which will fetch approximately Rs. 225m. The proceeds are going to be used for acquisitions in the US and UK, and development of own premises in North Kolkata.
Valuation:
The stock is trading at 12.5x on the consolidated FY05 EPS of 3.24 and 9.3x on FY06E EPS of Rs. 4.34 (on pre-bonus equity). In FY06E, the company will likely have a book value of Rs. 30 (on pre-bonus equity). On the current price of Rs. 40.6, it translates into a P/B of 1.4x. At this multiple, we believe that downside is limited but likely future growth is also factored in the price.
Earnings Model of standalone Ontrack:
(Rs M)
Y/E MARCH 2003 2004 2005E 2006E 2007E
Net sales 163 223 269 313 408
Change (%) ? 36.7 20.8 16.4 30.3
Cost of Sales 23 38 28 53 77
Staff Cost 78 113 153 159 205
Expenses 34 50 63 65 81
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EBITDA 28 21 25 36 45
Change (%) ? -23.8 17.1 44.9 23.6
Depreciation 14 14 14 16 23
EBIT 14 8 11 21 22
Interest 4 4 5 7 4
Other income -2 1 1 2 2
PBT 8 5 7 16 20
Tax 2 0 -3 2 2
Rate (%) 21.3 9.2 -39.4 11.5 10.0
REPORTED PAT 7 5 9 14 18
Adjusted PAT 7 5 9 14 18
Change (%) ? -29.4 101.6 46.7 29.4
EBITDA margin (%) 17.3 9.6 9.3 11.6 11.0
PAT margin (%) 4.1 2.1 3.5 4.4 4.4
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BALANCE SHEET
Y/E MARCH 2003 2004 2005 2006E 2007E
Equity share capital 50 50 50 75 150
Reserves 68 74 67 48 203
Networth 118 124 117 123 353
Loans 25 27 49 35 6
Net deffered tax liability 1 1 0 0 0
Capital employed 144 152 166 158 359
Gross fixed assets 72 78 86 106 196
Less: Depreciation 25 40 52 68 91
Net fixed assets 47 39 33 38 105
Investments 0 1 25 25 125
Curr. assets 112 138 129 125 171
Inventory 13 13 22 27 33
Debtors 68 75 86 95 125
Cash & bank balance 4 8 3 3 13
Loans & advances 27 42 18 0 0
Current liab. & prov. 22 29 21 29 41
Other Liabilities 12 19 14 20 30
Provisions 10 10 8 9 11
Net current assets 91 109 108 95 130
Misc. exp. (not w/o) 7 3 0 0 0
Application of funds 144 152 166 158 359
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Y/E MARCH 2003 2004 2005 2006E 2007E
Profitability ratios (%) ? ? ? ? ?
RoE 5.6 3.8 8.1 11.3 5.1
RoCE 7.3 5.6 7.4 14.1 6.7
Turnover ratios ? ? ? ? ?
Debtors (days) 153 123 117 111 112
Asset turnover (x) 1.1 1.5 1.6 2.0 1.1
E: Estimates 7.3 5.6 7.4 14.1 6.7
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Related Resources
Download ISO
Certificate Current (pdf: 784 KB)
Investor Alert
Download Annual
Report 2013(pdf: 828.0 KB)
Download Corporate
Brochure (pdf: 2.78MB)

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