INITIAL COVERAGE: DATAMATICS GLOBAL SERVICES

Datamatics Global Services Limited. a provider of data-driven business improvement solutions, performance solutions, and customer experience services. Digital Operations, Digital Experiences, and Digital Technology are the three key divisions in which the organization operates. The clients of the business are in the BFSI, Manufacturing, Hospitality, and Publishing sectors and international organizations. The business also specializes in business intelligence, robotic process automation, sophisticated analytics, and automatic rate collection. Through subsidiaries, Datamatics, which has its headquarters in Mumbai, is present throughout North America, Europe, Australia, and Asia.

ABOUT:

Datamatics Global Services Limited. a provider of data-driven business improvement solutions, performance solutions, and customer experience services. Digital Operations, Digital Experiences, and Digital Technology are the three key divisions in which the organization operates. The clients of the business are in the BFSI, Manufacturing, Hospitality, and Publishing sectors and international organizations. The business also specializes in business intelligence, robotic process automation, sophisticated analytics, and automatic rate collection. Through subsidiaries, Datamatics, which has its headquarters in Mumbai, is present throughout North America, Europe, Australia, and Asia.

Datamatics plans to concentrate on Intelligent Automation, Digital Transformation, and Automatic Fare Collection (AFC) products (TruCap+, TruBot, iPM, TruBI, TruAI, TruFare) using its own intellectual property. Over the next five years, it is predicted that the business's section of digital operations, which contributed 43% in FY23, will announce a large amount of new work, including enterprise back office operations and operations focused on certain industry verticals.

Overall, demand seems to be strong. The business is probably going to pick up some new customers, and it still has a healthy deal pipeline for the coming year forward motion. We expect the company to record revenue growth of 160.5 percent in FY24E and 15 percent in FY25E, respectively.

BUSINESS MODEL:

TruFare:

• A complete automatic fare collection system for rapid transit systems is called TruFare.
• TruFare from Datamatics is a cutting-edge Automatic Fare Collection (AFC) solution designed for urban transit systems that are adept at using technology.
• It is extremely scalable and able to handle big passenger loads without affecting response time or user experience. 
• The TruFare AFC system's modular design makes it possible to integrate new fare media and technologies like an open loop, EMV open loop, QR Code, NFC, account-based ticketing, card-based ticketing, and contactless mobile ticketing.
•  It improves the entire commuter experience for passengers and lowers the total cost of ownership for transit operators.

 TrueFareMonitor:

• From one central location, keep an eye on all field equipment, including automatic gates, validators, TVMs, etc.
• Always allow company continuity through easy remote monitoring of the AFC system.

 TruFareVend:

• Implement a self-service software package for devices like ticket vending machines (TVM).
• TVMs positioned strategically around high foot traffic locations will enable quick ticket issues and quicker crowd dispersal.

 TruFareCH

• Facilitate multi-modal, multi-operator, and multi-fare transit with the TruFareCH system using the Central Clearing House system (CCHS).
• Using the one nation, one card, one payment model, guarantees a flawless multiple-stop journey.

 TruFareToM

• Utilizing a fully functional staffed point of sale (PoS) system for ticket sales and customer service will speed up the ticketing process.
• Quicken the pace of staffed activities to fulfill tickets quickly and disperse the long, snaking lines more quickly.

 TruFareGate

• Install an automated gate and validator software suite.
• Make it easier to validate and deduct fares from a variety of fare media, including smart cards, tickets with QR codes, tokens, mobile tickets, etc.
• Make contactless fare collection and admission into crowded public spaces easier

 TruFareSecure

• Install a security module software application for encryption and decryption to ensure that only trustworthy devices communicate and that only valid tickets are accepted.
• Ensure safe and secure payment transactions in big and small ecosystems that are scattered but connected.

 TruFareMobile

• Implement a mobile application suite for contactless mobile ticketing and passenger trip planning.
• Make sure that multi-modal journeys have zero latency by using a safe and secure AFC payment
• Ensure virus-free transactions using mobile phone applications

The company has multiyear agreements with Delhi, Kolkata, and Meerut Metro Rails for automatic fare collection (using the TrueFARE platform), and the Datamatics AFC division generates about 6% of the company's revenue. These deals range from $85 to $100 million. Beginning in FY23, TCV acquisitions will add extra revenue over the following three to five years. The business is focusing on crucial measures like cost containment, client negotiations, and market expansion in the US. Aside from this, the business will probably continue to invest in staff, scale talent globally, and speed up innovation and digital capabilities to take advantage of the growing market prospects.

MANAGEMENT:

The promoters and other top management at the company have a wealth of experience in the IT and BPM sectors, which has fueled the company's development over time. Investors have confidence in the promoters and management because they are highly skilled and knowledgeable in their respective fields of responsibility. Mr. Lalit Kanodia, the founder and chairman of Datamatics, has more than 50 years of experience working in the IT services sector.

 One of the founders of the Indian software and offshore services industries, Mr. Lalit Kanodia (Chairperson & Executive Director) holds a B.Tech from IIT, an MBA from MIT, and a PhD from the United States. He also served as the company's first Managing Director.

Rahul Kanodia, Executive Director and CEO of Datamatics has more than 25 years of professional experience and has held a number of positions of increasing responsibility and leadership. With a concentration in business strategy and marketing and a minor in mergers and acquisitions and turnaround management, Rahul has an MBA from Columbia University (USA).

 The company's CFO, Sandeep Mantri, has more than 22 years of professional expertise. He oversees Datamatics' finances, accounting, administration, and travel. He is in charge of corporate accounting, corporate planning, risk management, taxation, administration, investor relations, M&A, and travel. He possesses the CPA, FCA, and ICWAI designations and is a Berkeley-HAAS School of Business and IIM Calcutta alumnus.

SHAREHOLDING PATTERN:

FINANCIALS:

• Datamatics announced strong results for the fourth quarter of FY23, with consolidated revenue increasing by 11.7% QoQ and 32.9% YoY to Rs 416 crore in local currency.
• To reach Rs 75.3 crore, EBIT increased by 50% QoQ and 84.5% YoY, and the EBIT margin increased to Rs 18.1% in Q4FY23 from Rs 13.5% in Q3FY23 and 13% in Q4FY22. To reach Rs 59.7 crore, net profit increased by 30.2% QoQ and 27.3% YoY. PAT margin increased from 12.3% in Q3FY23 to 14.3% in Q4FY22. It was 15% in Q3FY23.
• In FY23, the total revenue increased by 21.5% YoY to Rs 1459 crore, and the net profit increased by 25.5% to Rs 189 crore.

INVESTMENT RATIONALE:

Digital Experiences

Solutions for digital experiences offer remarkable customer service across all digital touchpoints. Throughout the entire customer life cycle, Datamatics' expertise in customer management processes and technology delivers exceptional and consistent customer experiences. Additionally, Datamatics has been concentrating on emerging digital technologies like an open loop, NFC, contactless mobile ticketing, automatic fare collection, and smart transportation as global development areas.

The demand environment is strong across all the markets and sectors that Datamatics serves. Priorities in datamatics for the upcoming year include tight cash flow management, supply, and talent integration, and a focus on the US market.

Rapid development in transportation including Metro and Roadway to bring AFC/CFC demand going forward

Automated Fare Collection, or AFC, systems are hardware devices that are powered by safe and scalable AFC software solutions. They are designed to automatically handle fare collection in high-traffic areas like parking lots, ferries, mass transit systems, rail lines, metro rails, and BRT systems. AFC systems are used to automate cash flow and ensure continued income while removing lines and crowds fast during busy rush hours. With the help of the mobile application contactless fare collection (CFC), travelers can use their phones to purchase tickets and transit passes for connected multi-modal trips that involve a railway, a waterway, and a road. Through UPI, credit cards, debit cards, and net banking, it enables contactless and cashless transactions.

Financial

The company's reported margin has fluctuated in the past; up until FY21, the EBIT margin ranged from 5.8 to 7.8%. The company's EBIT margin increased, reaching 13.3% in FY22 and 14.2% in FY23, thanks to attempts to reduce costs, pricing negotiations with customers, a better balance of offshore and onshore services, and a shift to IP-based products and platforms. In FY24E and FY25E, respectively, we anticipate margins to be 14.2% and 14.3%, underpinned by cost-cutting initiatives.  The digital technology segment has the lowest margins since AFC contracts have been acquired at a low margin to gain access, and product development costs are written off in the year of purchase rather than capitalized. In the wake of Covid, Datamatics closed some offices and reduced contractors, and margins increased in FY22. Low-margin work and customers were also permitted to trite.

RISK:

• The strengthening of the Indian rupee against the US dollar, price pressure, retaining skilled workers, rigorous immigration regulations, and rising visa expenses are major issues. In FY23, Datamatics received 66% of its operational revenue from the US, UK, and EU markets. Demand in these markets could be impacted by economic uncertainty and the prospect of an economic downturn, which could reduce income visibility.
• Due to its modest operations scale and significant exposure to West Asian and Indian regions, which have lower margins than the US and Europe, the company's margins are lower than those of other big IT layers.
• Datamatics' profit margins are vulnerable to pricing pressures and wage inflation because of the fierce industry competition. Additionally, a significant portion of the company's revenues and margins are subject to forex concerns, albeit these risks are somewhat reduced by the company's hedging strategies.
•  Datamatics attrition remained over 20%; it was 24.8% in Q4FY23 compared to 24.7% in Q3FY23 and 30% in Q4FY22, with fierce competition and a high need for talent as its key drivers. The hiring process for IT professionals has recently slowed down across the industry, and the organization is aiming to prevent attrition by raising wages.
•  The success of the Datamatics industry depends on the caliber of the workforce in developing and specialized markets. The ability of the business to provide customers with the best possible service may be compromised if key workers are not attracted, kept, and motivated.

VALUATION:

Datamatics offers services to a range of industry sectors, including publishing, manufacturing, banking and finance, insurance, and telecom. The business is focusing on developing new markets and expanding its network through alliances and acquisitions. In order to deliver a wide range of specialized, ingenious, and cutting-edge solutions that are driven by robots, IoT, cloud, and mobility, Datamatics has maintained a laser-like focus. We expect the company will have better potential in automation, robotics, and artificial intelligence as a result of an early segment introduction.

Its approach of concentrating more on the US and European markets while defocusing on India, employing local sales representatives in the US, and dividing sales teams for product- and IP-led businesses have begun to show some early signs of success. Adding more technologies could boost productivity and efficiency within the company, and the acquisition of RJ Globus Philippines and its successful integration has helped to stabilize the margin profile. We feel secure knowing that Datamatic has a solid order inflow, a stable financial profile driven by consistent revenue growth, significant liquidity, a healthy internal accrual generation, a comfortable capital structure, and promoters with considerable experience in the IT and ITeS industries.

In the past, Datamatics has revealed consistent and impressive revenue growth. The company's total sales for FY23 were Rs 1459 crore, while its net profit was Rs 189 crore. Over the previous ten years, these figures increased at a CAGR of 10% and 21.6%, respectively. Over FY23-FY26E, we anticipate net profit to increase at a rate of 18% while consolidated sales would increase at a rate of 20% CAGR.

Source:

-STOCX

-COMPANY WEBSITE

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