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Melstar: Margins under pressure

May 3, 2001

Melstar for the 4QFY01 has posted a small 1% QoQ (compared to 3QFY01) growth in revenues. The growth in net profits is a mere 6.3%.

(Rs m) 3QFY01 4QFY01 Change FY00 FY01 Change
Sales 194 196 1.0% 365 670 83.7%
Other Income 1 7 590.0% 2 15 565.2%
Expenditure 166 170 2.2% 286 573 100.5%
Operating Profit (EBDIT) 28 26 -6.4% 79 97 23.0%
Operating Profit Margin (%) 14.4% 13.4% 21.7% 14.5%
Interest -1 1 -2.2 5 1 -80.0%
Depreciation 5 5 - 13 18 38.6%
Profit before Tax 25 27 7.6% 64 93 46.6%
Tax 1 1 40.0% 0 3 800.0%
Profit after Tax/(Loss) 24 26 6.3% 63 91 43.1%
Net profit margin (%) 12.4% 13.0% 17.4% 13.5%
Piror years tax provison 0 1 0 1
Prior year expense income 0 1 -1 1
Extraordinary income 0 0 38 0
Profit after Tax/(Loss) 24 25 101 90 -10.1%
Net profit margin (%) 12.4% 13.0% 27.6% 13.5%
Diluted number of shares 13.8 13.8 13.8 13.8
Diluted Earnings per share* 7.9 7.4 -6.4% 4.6 6.6 42.7%
P/E (x) 4.3

The operating margins of the company continue to be a concern. The operating margins fell by 100 basis points compared to the previous quarter. Even in 3QFY01 the company's operating margins had dipped compared to 2QFY01.

A significant rise of about 600% in other income has ensured a growth in net profits compared to the 3QFY01. Excluding this the net profit figure would have dipped compared to 3QFY01.

On a YoY basis the company has managed to record a growth in the topline of 46% and a dip of 20% in net profits (excl. other income).

The performance for the fourth quarter is an extremely unimpressive as the company has neither managed to show any topline or bottomline growth. To add to the woes the operating margins have been decreasing. While staff cost as a percentage of revenues was just 16%, software development costs were 54% of the revenues. Usually software company's do not have such high software development costs.

For the year FY01 the company has managed a topline growth of about 83% and a net profit growth of about 43% (excl. extraordinary items). The company over the year has changed its business mix in favour of software exports. Software exports as a percentage of revenues has gone up to 92% from 69% in FY00. This has been done at the cost of income from domestic software services which has come down from 16% in FY00 to 5% in FY01. However, it is surprising to note that the company's operating margins have fallen inspite of a larger chunk of revenues coming from software exports. Operating margins have fallen by 680 basis points compared to FY00.

This decrease in operating margins is due to the significant rise in software development expenses that have jumped from 21% of revenues in FY00 to 47% of revenues in FY01.

According to the company the profits are lower than expected as heavy investments have been done during the year in development centers, quality teams, setting up subsidiaries and expansion of sales team.

At a current market price of Rs 28, the stock is trading at a P/E multiple of 4.3 times its FY01 earnings.

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