VisualSoft: Beginning of a recovery? - Views on News from Equitymaster

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VisualSoft: Beginning of a recovery?

Jan 23, 2002

VisualSoft has managed to post a sequential growth of 4% in revenues and a commendable 18% growth in net profits for 3QFY02. Trouble for the company began in 4QFY01, when it gave a profit warning. It fell short of earnings guidance given previously due to a steep decline in its product sales. For the next two quarters things went from bad to worse and the company continued to post steep sequential fall in topline and bottomline. However, it seems that the worst is finally over for the company. Though on a YoY basis, the numbers look very disappointing, the revenues have declined by 40% and net profits have fallen by 73%, this is due to the fact the 3QFY01 was one the best for the company.

The most positive aspect of the result is that not only has the company managed to post a sequential growth in topline, it has also improved operating margins. VisualSoft has achieved this by exercising a tight control on costs. The expenses have actually declined sequentially.

(Rs m) 2QFY02 3QFY02 Change
Sales 234 244 4.6%
Other Income 16 16 -1.4%
Expenditure 182 180 -1.5%
Operating Profit (EBDIT) 51 65 26.2%
Operating Profit Margin (%) 22.0% 26.6%  
Interest - -  
Depreciation 19 22 15.0%
Profit before Tax 49 59 21.3%
Tax 2 4 90.5%
Profit after Tax/(Loss) 47 55 18.2%
Net profit margin (%) 20.0% 22.6%  
Diluted number of shares (m) 19.7 19.7  
Diluted Earnings per share* 9.5 11.2  
P/E (at current price)   13.8  
*(annualised)      

The company’s product sales, however, continue to be in trouble. The figures have shown a significant 39% decline sequentially. Consequently, the contribution to revenues from product has declined further. It is the revenues from services that have helped company post a sequential growth in revenues. The company added 6 new clients during the quarter taking the total number of clients to 47.

At the current market price of Rs 155, the stock is trading at a P/E multiple of 14x its 3QFY02 annualised earnings. Considering the uncertainty in growth the stock price is likely to remain range bound in the near future. One should wait for the company to outline a clear strategy for growth and show some consistent performance before considering the stock as an investment option.


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