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Silverline: Lackluster numbers

May 2, 2002

In our previous story regarding the company, we had expressed concerns on the departure of Mr. Ravi Singh, the CEO. (Read more). Our concerns were that with the departure of Mr. Singh the company may go back to its traditional way of doing things, which has caused a negative perception regarding the stock. It seems our fears were not exactly unwarranted. Though Silverline’s performance for 4QFY02 is not surprising, its decision to change the close of its accounting year from March 31, 2002 to June 30, 2002 was out of the blue. According to the management the accounting year has been extended to reflect the operational & organizational restructuring undertaken and the business combinations & acquisitions effected by the company.

For the 4FY02, the company has posted a sequential decline of 8% in revenues. However, a significant other income component has helped the net profits to grow by 12%. Silverline’s operating margins headed south in 4QFY02, due to other expenditure increasing significantly. The company, however, managed to keep a check on its software development and employee expenses.

(Rs m)3QFY024QFY02ChangeFY0112mFY02^Change
Sales 404 373 -7.7% 2,727 1,776 -34.9%
Other Income 11 75 597.3% 366 171 -53.4%
Expenditure 264 255 -3.5% 1,637 1,224 -25.2%
Operating Profit (EBDIT) 141 119 -15.8% 1,090 551 -49.4%
Operating Profit Margin (%)34.8%31.8% 40.0%31.1% 
Interest 4 22 476.7% 10 31 221.7%
Depreciation 30 37 23.5% 103 125 21.8%
Profit before Tax11813514.4% 1,345 567-57.9%
Tax - 2   30 2 -92.9%
Extra-ordinary income/(expense) - (1)  - (1) 
Profit after Tax/(Loss) 118 132 11.8% 1,315 564 -57.1%
Net profit margin (%)29.1%35.3% 48.2%31.7% 
Diluted number of shares (m)85.685.6 85.685.6 
Diluted Earnings per share*5.56.1  20.5 8.8  
P/E (at current price)  7.1    5.0  
^Year ending extended to June 30, 2002

During the fiscal 02, the company, so far, has seen sales fall by 35%. Falling operating margins, lower other income and higher interest costs have caused the bottomline to fall even sharply at 57%. The deterioration in operating margins is due to the company’s employee costs declining at a lower pace compared to the fall in revenues. Also, the other expense component has shown a rise of 3% in 12mFY02 as compared to FY01.

In order to consolidate its operations at Chennai, the company relocated part of its operations from leased premises to its own software facility. Following the surrender of part of the leased premises, the company disposed off its assets at the previous location resulting in a net loss of Rs 10 m, which has been accounted for in 4QFY02. Excluding this the net profit figure for the company would have risen by 20% for the quarter.

At the current market price of Rs 43, the stock is trading at a P/E multiple of 5x its 12mFY02 earnings. The stock price is likely to remain range bound in the near future. A turn around in the US economy or the fact that the stock is trading at 0.3x its FY01 book value might cause the valuations to improve. However, retail investors would be better off if they steered clear of the stock.

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