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PSI: Unmotivated plans

Feb 15, 2001

After its lackluster performance in FY01, PSI Data Systems is looking at a growth rate of 50% in revenues for FY02. The FY01 performance was lackluster on two counts. Firstly, the growth rate for FY01 compared to FY00 at 39% was way below industry standard. Secondly, the operating margin was 20.8%. This too was way below the industry average. The company’s operating margins were low mainly due two reasons. One was primarily because, a significant proportion of its revenues come from Indian operations (23%). The operating margins are low in domestic operations. Secondly, its ATM business had lower operating margins (it has now been sold off).

The company plans to improve margins by increasing contribution to revenues from Europe and US. PSI is hoping to raise operating margins by 2-3% through this move. The margins from US and European operation were in the region of 28% in FY01.

(Rs m) FY01 FY02E Change
Sales 830 1,245 50.0%
Other Income 20 25 26.2%
Expenditure 657 934 42.1%
Operating Profit (EBDIT) 173 311 80.0%
Operating Profit Margin (%) 20.8% 25.0%  
Interest 4 5 15.7%
Depreciation 25 25 1.3%
Profit before Tax 164 306 87.0%
Tax (8) 12 -265.1%
Provision for contingencies 0 0  
Profit after Tax/(Loss) 171 294 71.5%
Net profit margin (%) 20.6% 23.6%  
Extraordinary item 11 0  
Net profit 182 294 61.3%
No. of Shares (eoy) (m) 7.6 7.6  
Diluted number of shares 7.6 7.6  
EPS 24.0 38.7  
P/E (x) 11.55 7.16  

The positives for PSI are that it is not projecting very ambitious figures for FY02. The growth figures PSI is looking at are very modest. And if the company performs better it will certainly be held in better light. The company is also looking to improve margins as the ATM business has been sold off to Diebold HMA.

However, the software sector has seen blazing performance by most of the companies with growth rates at 100% plus and operating margins in the range of 33%. Therefore, this kind of a target may not augur well with the investor community.

Last year, onsite operations accounted for 58% of the company's revenues while the balance came from offshore projects. The company does not see any significant change in this mix in FY02. PSI is not expecting any major growth in the billing rates for both onsite and offshore operations. Currently, PSI's onsite billing rates average about US$ 67 per man-hour, while its offshore rates range between US$ 28 and US$ 31 per man-hour. The billing rates are comparable to the second rung software companies.

The client addition during the year has been healthy. PSI added 35 new clients, excluding those added through Bull and other partners.

Europe accounted for around 47% of the revenues in FY01 while the contribution from the United States was 30% and the balance coming from Indian operations. The company is looking at growth by changing the geographic revenues mix. The share of United States is to go up to 35% mostly this would be on account of drop in the contribution of Indian operations.

The company’s major source of income is Europe due to the fact that Bull is based in Europe. But as the US economy slows down, many players are looking at Europe. This could make things tough for the company.

PSI Data FY01 results were announced on 2nd Feb 2001.

Internet and Java-related work contributed 55% to PSI's revenues while data warehousing, mission-critical applications and other development works accounted for 15% each. PSI is looking to increase the contribution of Internet and Java to 60% of the revenues. The billing rates for these technologies are expected to be in the range of US$ 60 – US$ 75.

We expect PSI’s FY02 performance to be similar to FY01, i.e., lackluster. The plans to grow seem to be half hearted. While the company is looking to ramp up operations in the US and increasingly orient towards Java and Internet technologies there are no plans to improve productivity or move up the software value chain. For FY01, sales per employee (600) was Rs 1.38 m. The figure is expected to be the same for FY02 (with 900 employees).

At the current market price of Rs 277, the stock is trading at a P/e multiple of 7.1 times its FY02 expected earnings. The valuation is low compared to its peers in the software industry owing to the company’s staid business plans. However, the company can achieve its targets and on that basis, the valuation could see an upside in the coming months.

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