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SSI: Slow going continues - Views on News from Equitymaster
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  • Feb 25, 2002

    SSI: Slow going continues

    SSI, for 2QFY02, posted a sharp 43% fall in revenues. The drop in net profits has been even steeper at 93%, after accounting for an extraordinary loss of Rs 27 m. Excluding this item, the fall in bottomline was 94%. While the dismal performance is partly due to the tough business environment the education industry is going through, SSIís performance in the software services segment too has been abysmal.

    Despite the steep decline in topline, the operating margins fell moderately. The company managed to maintain margins on account of tightening its costs in line with the drop in the revenues. Infact, SSI has managed to reduce courses execution costs as a percentage of revenues from 31% in 2QFY01 to 29% in 2QFY02. The other major cost head for the company is its employee costs at 28% of the revenues.

    (Rs m) 2QFY01 2QFY02 Change
    Sales 1,154 661 -42.8%
    Other Income 80 24 -70.2%
    Expenditure 839 500 -40.4%
    Operating Profit (EBDIT) 315 160 -49.1%
    Operating Profit Margin (%) 27.3% 24.3%
    Interest 13 1
    Depreciation 56 160 187.1%
    Profit before Tax 326 23 -92.9%
    Extraordinary items (28) -
    Tax 48 6 -88.1%
    Profit after Tax/(Loss) 251 17 -93.1%
    Net profit margin (%) 21.7% 2.6%
    Diluted number of shares 13.5 13.5
    Diluted Earnings per share* 74.3 5.1
    P/E (at current price) 39.6

    Revenues from its education business have declined by 51%, on a YoY basis. Consequently, contribution from its educational division as a percentage of total revenues has come down from 55% in 2QFY01 to 47%. However, disappointing aspect of the performance is the fact that revenues from its software services business have also declined by 24%, YoY. The software industry (according to Nasscom) has clocked around 25% growth for the quarter ended December 2001. According to the management, the company was impacted by the slowdown, post Sept 11 attacks in the US. However, on a QoQ basis, the revenues grew by 2%, in line with the sector growth rate.

    2QFY01 2QFY02 Change
    Revenue mix (Rs m) % Contribution % Contribution
    Education 631 54.7% 311 47.0% -50.8%
    Software 460 39.9% 350 53.0% -23.9%
    Enterprise support 63 5.5% - - -100.0%
    Total 1,154 661 -42.8%

    Enrollments for SSIís education business headed south. Volumes fell by 22% as compared to the quarter ended September 2001. This is contrary to NIIT, which showed a jump of 37% for same period. Average realisation (revenue per student) for SSI declined by 18% as compared to 45% for NIIT. The higher growth in volumes for NIIT could have been a result of the company cutting course fees aggressively to gain market share. This might force SSI also to lower course fees in the coming quarters, which could dent profits further. So, the fall in realisations is expected to continue for sometime in the future. SSI added 23 new centres during the quarter taking the total number of centres to 749. The fallout of a partnership with the University of Madras also impacted the companyís revenues. In October SSI and the University had entered into an agreement. But this arrangement did not work out and SSI has reversed all enrollments and refunded fees obtained from the program.

    On the software services business front, the company added 11 new clients and 86% of the revenues coming from the US. Revenues from US and Europe declined as compared to the quarter ending September 2001.

    The contribution from offshore projects to total revenues increased from 29% in 1QFY02 to 31% in 2QFY02. However, the fact that SSI earns 69% of its revenues from onsite projects could be the reason for the companyís making a loss in its software business. The operating margins for offshore business are higher as costs tend to be lower. SSI also saw clients increasingly opting for time and material projects. This was quite contrary to sector trends.

    The recent project won by SSI was to build and maintain the Wyoming Family Assistance Management Information System (FAMIS). This has caused the stock price to jump. The project is expected to gross US$ 20 m (Rs 960 m) over a period of three years. This translates to Rs 320 m (US$ 7 m) per year. Considering that the company has clocked revenues of Rs 693 m (US$ 14 m) for 1HFY02, it has added 23% to its annualised revenues (based on 1HFY02).

    At the current market price of Rs 204, the company is trading at 40x its 2QFY02 annualised earnings. This is more than the valuations accorded to Infosys. Considering the dismal performance in the software business and no signs of recovery for the education sector in the near future, the stock is priced very expensively. Also, the earnings growth of the company is likely to be slower considering the continuous decline in realisations from its education business.



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