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SSI: Competition takes toll

May 8, 2002

SSIís results for 3QFY02 did not spring any surprises. The companyís revenues dropped to almost half of what they were in the corresponding quarter of the previous year. A steep fall in operating margins caused the bottomline to slide by a significant 77%. This drop would have been higher but for a significant other income component.

(Rs m)3QFY013QFY02Change9mFY019mFY02Change
Sales 1,037 569 -45.1% 3,207 2,059 -35.8%
Other Income 18 90 414.3% 219 187 -14.3%
Expenditure 756 440 -41.8% 2,349 1,632 -30.5%
Operating Profit (EBDIT) 281 129 -53.9% 858 427 -50.3%
Operating Profit Margin (%)27.1%22.7%26.8%20.7%
Interest 12 13 3.6% 42 30 -28.9%
Depreciation 60 158 162.7% 167 478 186.8%
Profit before Tax 226 49 -78.3% 868 106 -87.7%
Tax 50 8 -83.1% 137 21 -85.0%
Extra-ordinary income/(expense) - - 28 0
Profit after Tax/(Loss) 176 41-77.0%70386-87.8%
Net profit margin (%)16.98%7.12%21.91%4.16%
Diluted number of shares13.413.413.413.4
Diluted Earnings per share*52.612.169.98.5
P/E (at current price) 15.7 22.3

The decline in revenues from its software education business was largely responsible for the fall in topline. Revenues from the education business declined by 63% on a YoY basis. Consequently, its share in revenues declined from 55% in 3QFY01 to 33% in 3QFY02. Software services also clocked an 18% decline YoY in revenues during the quarter. However, on the brighter side, revenues from software services grew sequentially by 3%. The contribution to revenues from the software business increased from 43% in 3QFY01 to 67% 3QFY02.

The decline in operating margins has been due to the staff costs not declining as sharply as topline. However, the course execution charges declined in line with the topline, which cushioned operating margins despite the sharp decline in topline. Peers like NIIT have seen operating margins fall from 22% to 14% during the quarter.

SSI Limited contributed 65% to the consolidated revenues of SSI. While the numbers are not available on a YoY basis, on a sequential basis, the education business has declined by 33% and the software services business has grown by 1%, as per the consolidated numbers.

Education business
The education business saw a 43% YoY decline in enrollments for 3QFY02 (YoY). Compared to 2QFY02, the registrations declined by about 23%. The remaining fall in revenues (33% decline) stemmed from the average realisation per student falling from Rs 7,700 to Rs 6,800, a decline of approximately 12%. This indicates that the company is still witnessing pricing pressure. NIIT, however, showed a significant improvement in realisations for the quarter.

The company added 21 new centres during the quarter, taking the total number of centres to 771. While SSI has a very limited reach compared to NIIT, its realisations per centre have traditionally been far superior as compared to NIIT. However, during the quarter stiff competition and weak business environment has forced the number to fall below that for NIIT. This could be an indication of NIIT gaining ground on its competitors.

ParticularsSep - Dec 01Jan - Mar 02
No of centres (Nos) 2,497 2,510
Revenues (Rs m)742814
Revenue per centre (Rs) 297,157 324,303
No of centres (Nos)749771
Revenues (Rs m)311209
Revenue per centre (Rs) 414,686 270,947

To counter the fall in business, SSI is concentrating on institutional business. The company has got business from government agencies in Tamil Nadu, Sikkim, Uttranchal, Andaman & Nicobar, Institute of Chartered Accountants of India (ICAI), Indian Institute of Metals, Directorate of Education, Delhi, and others.

Software business
During the quarter SSI added 10 new clients. These include The Department of Family Assistance, Wyoming. The company focused on verticals like government services, enterprise applications, and financial services. While the banking, financial services and insurance vertical that contributes to 33% of SSIís software revenues showed a marginal decline in revenues, the government services vertical grew by a strong 66% sequentially.

The revenue break up based on geography and onsite offshore mix did not change materially in 3QFY02. The company earns 68% of its revenues from onsite projects. Thus, there is a significant potential to move business offshore and improve operating margins.

While the company has managed to post a 1% sequential growth in software revenues (consolidated), the performance is quite feeble. Most of the second rung software companies including NIIT posted much better revenue growth rates. Also, the companyís operating margins in the software business at 6.3% are way below the industry average of around 30%.

At the current market price of Rs 189, the stock is trading at a P/E multiple of 22x its 9mFY02 annualised earnings. The stock price is likely to remain range bound in the near future. At one end, its education business is continuing to show signs of strain, while NIIT is beginning to see some respite. Also, as far as the software business is concerned the company is not a very strong brand and will find going tougher as competition intensifies further.

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