Aftek Ltd, which is into verticals automotive telematics, wireless and mobile and enterprise communications, is looking at new avenues in the energy sector in US, said Ranjit Dhuru, Chairman & CEO, Aftek Ltd, in an exclusive interview with Indiaearnings.com

"We are always looking for new avenues, we have such avenue in mind in the energy sector where we have declared our intentions. We are still at a very early stage to say that we are acquiring or we are investing but you may hear from us something to that effect. It is in the US and this energy sector is helping- because there is a lot of grid failures that happened in the US so they want to digitally enable the generation of energy," said Dhuru.

US and Europe are there main revenue contributors in terms of geograhies with a miniscule amount coming from Japan. They expect their Japanese business to grow by 15% in the 2-3 years.

Excerpts of the interview with Ranjit Dhuru, Chairman & CEO, Aftek Ltd

Q: Can you throw some light on your company’s business and what verticals are you into?

A: Yes, Aftek works in the area of communications. When I talk about communications I am talking about from L1 to L7; there are seven layers in communications. We work and engage our clients in all those seven layers. If you look at the verticals that we work on they could be classified in three major verticals; one is, we work in the area of automotive telematics that is for communications within and beyond the automobile, the second is into wireless and mobile and the third is enterprise communications where enterprise search is very important part of integration of information and communicating the same information across the enterprise. So you could say that we work in the area of communications in these vertical segments.

Q: Your Q2 net sales and net profit has grown by 19% and 14% respectively so what led to this kind of growth, what are the factors?

A: This has been a twenty-year-old company so over this period we have learnt a lot of things and we have planned a lot of strategies, which improves our performance YoY basis. However, last quarter an unplanned thing happened, the dollar dropped down so our quarter performance took suffering in the last quarter. We addressed that issue in this quarter. We have renegotiated with our clients and you see a better performance which chould correspond to what you can see in the earlier quarters. So this is a planned growth that is going on for the last few years and you are going to see this is happening in the next few years too.

Q: Since you are talking about the dollar falling against the rupee, how do you see yourself combating with the rupee appreciation issue?

A: Aftek is in a very unique situation here. Almost 40% of our business comes from Europe and in Europe. Euro is the currency which has appreciated by almost 1.3 vis-à-vis the rupee. So we are standing to gain there. Yes the dollar has dropped down. We do understand that but our agreements do provide for a correction of 2% when there is a difference in dollar of 2% from this quarter onwards we are going to a correction to that effect. So I do not see this really impacting us. What we see along is India’s competitive edge is getting eroded so that is a concern but we are addressing it through going upstream in technology.

Q: What is your segment-wise revenue mix right now?

A: If you look at our segments, you could divide them into three equal parts. one is our strongest segment which is in the automotive and it is getting to be most stronger because of our relationship with ESG and with companies like BMW. But we see at the same time our traditional segment of mobile and wireless, which we have been working for the last five years, has been growing and new companies have joined in over there. We are also doing some very interesting designs for communication companies especially out of the US so we see that as a strong revenue that contributes to almost 60% of our revenue. Automotive segment takes number two and enterprise is a glowing technology so the rest comes from the enterprise.

Q: What is the geographical mix?

A: Geographical mix is divided. US is a major contributor about 55% come from US, 40% from Europe largely from Germany and then we have business coming out of Japan which is about 6%. We believe this business from Japan is going to go up because we merged a company recently which does a lot of work in Japan. So we are going to see some more work coming from Japan. We have some traditional business coming out of India.

Q: You said you are seeing lot of opportunities coming from Japan, can you throw some light on that?

A: The Japanese market looks very promising because of our merger with L1 and L1 already has strong relationships with companies like IPFlex. These are pretty well known companies in Japan.

In Japanese markets we believe that our growth is going to come in chip designing and Japan creates a lot of devices in the electronic space. We see this as a continuing opportunity. Some time back our business was largely out of the US then strategically we got more business coming from Europe and now our spread is between Europe and US.

We get about 55% from US and 40% from Europe and we have only 6% coming from Japan. We see the Japanese pie also growing. We expect that to grow to about 15% in the forthcoming years, probably in the next two-three years. Because the contracts that we have signed appear to give us a very good boost but you have got to know the European business in automotive is also peaking up so we are going to see this kind of a spread.

Q: What about India, does any segment of your revenue come from domestic market?

A: We are a twenty-two years old company so some part of the business, which is a traditional business, comes from India. However, with Digihome coming into the scene, Digihome, happens to be an IP based intellectual properties of Aftek which are monetized in Digihome, is a largely Indian outfit and in that outfit we see a lot of business flowing in the next few years starting from 2008 and that is going to be largely Indian business. So you might see an Indian component that will grow as Digihome grows.

Q: Going back to dollar depreciating issue, do you see that affecting the pricing scenario in US where you are dealing with your clients?

A: We have insulating contracts with our customer. If there is a 2% change they do give us a correction that is not good enough. You have got to know that India has a price advantage because we are a low cost factor country that is fastly eroding. So for companies like Aftek it is necessary to keep the technology edge going on. We are moving upstream, we are acquiring constantly new technologies, we are developing new IPRs. The idea is to keep upstream otherwise you are not going to get the kind of advantage that you would have otherwise got out of the rupee being weaker. Now the rupee is getting powerful and we expect the rupee to go even stronger as quarters go by and if you have to look at the Indian economy I believe the rupee might even go to 35 vis-à-vis the dollar. So we are looking at such a scenario and we are trying to see how our cost factor vis-à-vis the technology and the bandwidth that we can give to our customers is going to be leveraged.

Q: Talking about the other issue, which is wage inflation in your industry, are you seeing that as a concern?

A: It is always a concern because at one end the rupee is appreciating and the dollar is depreciating. Yes the euro has maintained on, the yen is maintaining so we are happy on these currencies. But if you look at the overall scenario we do see that as a concern because we are paying more for less money that we get. So there has to be a balance at some point in time. Off course our customers do understand that we are not only a cost cutting center but we are a technology provider. So that establishment is very important for Aftek and I think that is what we are trying to establish with our client. We have been successful with several of our relationships but we need to do that with all our clients.

Q: You have a tie up with BDT of Germany, can you just explain how the deal works and when is it going to start reflecting on your income statement?

A: You are going into the application area. About in 2003 we acquired a company called Arexera, which is largely a European company out of Munich, it is a German company. They had very significant IPRs, intellectual property rights. One such property right, which goes into the enterprise search area was leased or rather licensed to BDT. BDT is a server and storage company having a long history in Germany. It is a market leader worldwide in SMEs. BDT has come up with the new device of a network appliance and a core technology there goes from Arexera, the enterprise search part.

We imagine that they are looking at this as their next generation of server that they are going to supply to their customers, so it is a very prime product for them. Their business is expected to grow at a phenomenal pace. They already are a 300 million euro company and they are growing at a very fast pace. So in the next forthcoming quarters starting from 2008 this is going to convert into a decent size business for Aftek or for Arexera.

Q: Talking about Seekport, you have about 24% stake in Seekport and I believe it got listed recently. Are you going to offload some stake in Seekport and if you can convert it into rupee terms?

A: If you look at Seekport, people get hyped because it is a search engine. When we acquired Arexera we recognized that there was a search component that could be monetized in the Internet space. So what we did is we leased out or we gave this as a licensee to Seekport and in return we have got shares of that company which is that 24% you are talking about.

This company got listed. It has been in operation for three years. It is still not fully broken even, it is growing its footprint. What has happened is this is a very hot area in internet space and they are sitting right in mids where you hear strange valuations from Chinese language search engine, Baidu, from Alibaba, from Yandex and even from Google itself. So that opportunity is also available to Seekport and we can see it happens.

But what one should caution is no trading has taken place as yet, there are some significant funds that are coming on board and I believe in the next few weeks that would happen. Once that happens we proposed to liquidate a part of our holding to see that there is real money flowing to Aftek through Arexera and then we will decide what to do with that.

Q: What will be the part of money that you are planning to liquidate?

A: It is premature for me to put any figures here but we have a polling agreement with the other shareholders thereby we would be liquidating to the extent of 10% of our holdings. So let us say that our holding if the valuation that has been given by the exchange is correct after trading occurs, it is important to note that trading has to occur for this valuation to be crystallize, would be around Rs 700 crore. So 10% would be around Rs 70 crore.

Q: That is when it starts trading?

A: Yes.

Q: Any other acquisitions or products, which is there in the pipeline?

A: We are always looking for new avenues, we have such avenue in mind in the energy sector where we have declared our intentions. We are still at a very early stage to say that we are acquiring or we are investing but you may hear from us something to that effect.

Q: You are concentrating on the energy sector internationally?

A: Yes, it is in the US and this energy sector is helping- because there is a lot of grid failures that happened in the US so they want to digitally enable the generation of energy so that they can optimize the usage and we are one such player along with many other US agencies who are working in that direction.

Q: Can we hear some news in the forthcoming quarter?

A: You will hear it, it is our policy now to announce only when things occur. So we will let you know.

Q: What is your outlook for FY08 and if you want to give some guidance?

A: We have given a general guidance but there has been a lot of factors that are not in our control like the dollar which has been creating problems. So we have now taken it as a policy to declare our guidance on QoQ basis. So I can tell you what we have declared for the next quarter. We are on course and we should be able to do between USD 25-26 million in revenue with a healthy bottomline to the extent of about Rs 28 crore on the bottomline.