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Silverline: Cutting costs

Feb 2, 2002

Silverline Limited (the numbers are only for the Indian operations) has posted a steep 9% decline in revenues and a 15% drop in bottomline for 3QFY02. On a YoY basis, the topline has declined by 44% and the drop in net profits is a steeper 66%. One of the reasons for the steep decline in revenues could be the fact that the company earns about 92% of its revenues from e-business solutions. This area has been witnessing significant weakness as corporates are delaying their online initiatives in wake of the economic slowdown. Silverline Limited contributes about 35% to the consolidated revenues of the Silverline group, the numbers for which are yet to be declared.

(Rs m)2QFY023QFY02Change9mFY019mFY02Change
Sales 442 404 -8.5% 2,117 1,403 -33.7%
Other Income 59 11 -81.7% 306 96 -68.7%
Expenditure 329 264 -19.9% 1,249 970 -22.4%
Operating Profit (EBDIT) 113 141 24.6% 868 433 -50.1%
Operating Profit Margin (%)25.6%34.8% 41.0%30.9% 
Interest 5 4 -18.3% 9 9 2.8%
Depreciation 29 30 5.5% 74 88 18.0%
Profit before Tax139118-15.3%1091432-60.4%
Tax - -  6.5 - -100.0%
Profit after Tax/(Loss) 139 118 -15.3% 1,084 432 -60.2%
Net profit margin (%)31.4%29.1% 51.2%30.8% 
Diluted number of shares (m)85.685.6 85.685.6 
Diluted Earnings per share*6.55.5   7  
P/E (at current price)  10.9    8.9  
*(annualised)      

The company’s operating margins moved up sharply during the quarter. This is due to the fact that it has cut corners aggressively. On a sequentially basis, the staff costs and software development costs have declined by 15%. The other expenses head has fallen even more sharply by 34%.

Silverline added five new solutions clients in the US along with additions in the Europe and Far Eastern geographies. The company also got new projects from existing companies like Amgen, Citibank and First Union.

At the current market price of Rs 60, the stock is trading at a P/E multiple of 9x its 2QFY02 annualised earnings. The abysmal valuations are due to the fact that the company has reported a significant fall in revenues 34% in 9mFY02. Another major concern with the company is its management. However, sometime back a few changes were announced and the co-CEO Mr. Ravi Singh had assured the company would make efforts to change the management perception. Considering the fact that the company is trading at a P/BV of 0.4x, the valuations might see a significant upside when the markets conditions for the software sector improve. Retail investors should be very careful before considering investment in the stock as the stock draws a blank on one of the most important reason to buy – the management’s perception.


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