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Unilever order to help Digital cut exposure to Compaq

NetScribes/Ganesh Ramamoorthy

Analysts have welcomed the appointment of Digital India as an offshore delivery partner of global fast moving consumer goods giant Unilever. The new assignment is seen helping Digital further reduce its revenue dependence on Compaq.

Digital would assist Unilever to deploy and roll out its standard desktop configuration across its various operations in North America, notably in its new Unilever Bestfoods division. This will also involve programme management and architect services from Compaq Professional Services, NA.

Though Digital India refused to reveal the size of the deal, market sources said it could be between $50-100 million. However, given the nature of the high-end work that Digital would be doing for Unilever, analysts said the order size could even be bigger.

With the order to be executed over a period of two years, analysts expect Digital to realise around Rs 500 million in the first year in the topline. This means the positive impact on EPS would be around Rs 3, while that on the scrip price could be around Rs 120, assuming current levels of discounting.

"The good part about the order is that it is offshore, which means Digital would be able to achieve higher margins," said an analyst at Asit C Mehta Brokerage.

Traditionally, Digital's onsite business has contributed more to the revenues than its offshore business. The onsite business accounted for about 68 per cent during the quarter ended December 31, 2000. "So this order will get the business to shift to offshore and help push the margins up further," the analyst said.

According to analysts, the new order would be a very positive development for the scrip, as it will enable Digital, which currently derives about 87 per cent of its revenues from Compaq, to derisk its business model. At the same time, Digital will continue to benefit from its association with Compaq. The Unilever order, for example, happened because of Compaq's relationship with the FMCG major.

"Even as the risks of high client concentration remain, we are also seeing benefits from that. So, going ahead, when Compaq feels the business pressures on its own operations, it would find it relatively easier to reduce billing rates," said Sohini Andani, LKP Shares & Securities analyst.

As the news of the order have already been doing rounds, analysts say positions would have been built up in anticipation of the order. Hence, they expect some profit-booking in the next couple of trading sessions. The scrip has gained Rs 43 in the last two trading days.

On Friday afternoon, the Digital scrip was trading at Rs 721.25, up from its previous close of Rs 717. Over 576,000 shares were traded on the Bombay Stock Exchange. At its current market price, the scrip is trading at a forward earnings multiple of about 42 times its annualised EPS of Rs 17 for FY 2001.

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