STOCK IDEAS- GSS America Infotech Limited

GSS America Infotech Limited

BSE Code: 532951

NSE Code: GSSAMERICA

GSS America Infotech Ltd. (GSS) is a global provider of customized IT solutions and software services to clients with specialization in IT Consulting, IT Infrastructure Management Services and Enterprise Application Integration.

Business:

Incorporated in 2003, Hyderabad based GSS is SEI CMMI assessed company with offices in US, UAE, India & Singapore and offshore development centers in India. GSS has highly competent workforce of over 700 professionals working on different skill sets.

GSS offers customized IT solutions in E-business, Enterprise Application Integration (EAI), IT Infrastructure Management and managed services (IM/MS), product development and data warehousing for industries in the areas of financial services, insurance, telecom, retail, manufacturing, transportation, healthcare energy and utilities. The company offers services in application development & maintenance, application re-engineering /migration, QA /testing, business intelligence and enterprise portals & content management.

Enterprise Application Integration (EAI): This SBU contributes 40% to the sales revenues and helps organizations to reconfigure their business processes through tighter integration of applications from multiple vendors based on different technologies. With its experience of working with tier-1 service providers, GSS has developed flexible and scalable EAI solutions based on Service Oriented Architecture (SOA) principles and built on products such as TIBCO, BEA WLI and See Beyond. GSS works as a strategy and consulting unit for companies to chalk out and implement their EAI strategy through an onsite-offshore delivery model, and finally manages the projects offshore.

IT Infrastructure Management & Managed Services (IM/MS): GSS has strong focus on this segment which is highly critical for any organization given its turnkey nature and derives 40% of revenues from this segment. Thorugh this SBU, GSS helps the customers to assess, build, deploy and optimize IT Infrastructure for mission critical applications. The business also includes system integration, facilities management, software services and outsourcing. GSS America’s IT Infrastructure Framework (ITIL) includes methodologies such as business continuity planning, IT infrastructure management, disaster recovery management and security framework for enterprise and application security.

Product Development: GSS has developed a product inhouse which is bundled along with its IM/MS offerings. GSS has a product in Business Service Management - Web-Based Reporting tool for CONTROL-M gives administrators and end users an intuitive and easy to use way to control and manage the CONTROL-M environment. This segment contributes 10% to its annual revenues.

New offshore centre to add margins

GSS is setting up an offshore development centre in Hyderabad; it’s third in the city and fifth globally, at an investment of Rs 66 crores. This 1,000 seater facility will be operational by Q3 FY09 and would help to increase its offshore revenues share from 25% currently to 35% of the total sales revenues and also aiding margins going forward.

GSS has shown considerable growth with revenues growing from Rs. 63.2 crores in FY06 to Rs. 298.7 crores in FY08. During this period, GSS acquired Infospectrum Consulting - US based company into Infrastructure management and System Dynamix – having domain consulting expertise in the Insurance sector. Through this inorganic growth strategy, it has been able to fill gaps in its service offerings and also expand its client base. “We are looking out for further acquisitions in US in coming 2-3 months and are in advanced negotiations with one US company” said Mr. Ravi Shankar Chivukula, CFO of GSS.

Currently GSS derives all its revenues from US with clients across diverse sectors which includes major fortune 1000 companies like Ernst & Young, Blue Cross, Thomson, Pepsi Co., BMC Software, Sears, WR Grace & Co., etc. Sectorwise GSS derives around 20% revenues from banking & finance services, 20% from insurance segment, 16% from telecom, 6-7% from retail & consumer and rest from other verticals.

In order to reduce its dependence on US market, GSS is looking to establish its presence and increase its client base in Asia Pacific & European countries. GSS has recently started its operations from Dubai & Singapore offices in order to cater to Middle East & Far East Asia customers. There are few business deals in the pipeline from these regions which are likely to mature by Q3 ‘08.

Investment rationale:.

GSS has become total IT solutions provider with high end and niche offerings in EAI & IM/MS space which generates high volume business, and higher-margin services such as product development, IT consulting and web hosting. Being into IM/MS space which is highly critical for any business organization, GSS is immune to economic slowdown. Further GSS has aggressive organic and inorganic growth plans which will help to increase its offshore segment activities leading to increased business and higher margins. Tapping newer markets apart from US would further strengthen its global delivery capabilities and would be a very important step to drive future growth.

Concerns:

GSS derives all its revenues from the US, hence due to this lack of geographical diversification it remains exposed to economic slow down in the US economy. GSS which derives a considerable part of its revenue from exports faces currency exchange risk. GSS which is looking for inorganic growth through acquisitions faces challenge in integration of its acquired companies.

Valuations:

GSS with its unique offerings in IT infrastructure management & EAI is expected to continue its growth momentum going forward backed by inorganic expansion route. On the back of recent IPO, GSS has good cash book position of around 160 crores which would be utliised for expansion. GSS’s revenues are expected to grow organically at CAGR of 58% over FY08-FY10E and net profit at CAGR of 51% between FY08-10E. At CMP of Rs 290.4 it trades at a P/E of just 6.21 its FY08 earnings and at 4.10x & just 2.66x its FY09E & FY10E earnings respectively. At current levels, GSS looks good and investors can keep a view on it for medium to long term perspective.

SALES AND PROFIT PROJECTIONS
	Q4	Annual	Annual	Annual
in Rs. Crore	FY08	FY08	FY09(E)	FY10(E)
Net sales	94.88	298.70	495.00	742.00
OP	21.70	74.35	116.33	178.08
PAT	18.44	62.20	94.05	144.69
Capital	13.30	13.30	13.30	13.30
EPS (Rs.)	13.86	46.76	70.71	108.79

PRICE AND VALUE RATIOS
Price	290.40	Date	13/06/2008
PE	6.21	PB	1.52
Book value per share	191.00	EV	226.23
EV/EBIDTA	3.04	Mcap	386.23

SHAREHOLDING PATTERN
Share holding	Mar 2008
Promoter owned	48.63
Public owned	4.87
FIIs owned	9.96
Others owned	36.54