Mcap helps Indian software companies grow - Views on News from Equitymaster

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Mcap helps Indian software companies grow

Mar 10, 2000

Cyberspace Infosys, a Mumbai based infotech company, is planning to acquire three US based software companies which have a combined revenues of $ 20 million (Rs 880 million). Cyberspace concentrates on software services such as customer relationship management and enterprise resource planning. The company had a turnover of over Rs 90 m for the year ended June 1999 and has reported a turnover of Rs 120 million in the first half of FY 2001.

It’s basically the market capitalisation of the software companies in India that is helping the Indian companies to bid for US companies. The market capitalisation of Cyberspace Infosys comes to over Rs 15 bn almost six times the companies expected turnover for the FY 2001.

The takeover of the US based companies if it were to go through would add a further Rs 880 million to the turnover of the company. This not only gives their turnover a big jump but also gives them access to the clients of the companies they have taken over. However, the price at which the US companies are taken over would be critical to the payback period.

This deal, if it were to go through, is in line with a recent deal that another software company Subex entered into. Subex brought over a US software company which has a turnover of $ 6 million (approx. Rs 264 m) when its own turnover is around Rs 50 m. This also gave it the clients such as AT & T and Lucent. Subex funded the deal through a private placement and Cyberspace plans to do the same.

Market View:
The stock has had a good run in the recent software rally and currently quotes at a earnings multiple of 226 of FY 99 earnings. Perhaps the only gray area is the de–rating of the sector itself, which could hit the valuation in the future.

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