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VisualSoft 4QFY01: How bad? - Views on News from Equitymaster
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  • May 14, 2001

    VisualSoft 4QFY01: How bad?

    VisualSoft had surprised the markets, quite unpleasantly, by giving a profit warning. According to the company, its product sales had taken a hit due to the downturn in the US economy. The results for 4QFY01 reveal the extent of the damage.

    The company posted a sequential (QoQ, compared to 3QFY01) dip in sales of 15%. The impact on the bottomline was far more severe with net profits plunging by 41% sequentially (excl. extraordinary income). Dip in revenues was mainly due to the product related revenues falling by 39% sequentially. The project revenues showed a meek growth of 10%. Due to the product sales taking a hit the business mix changed dramatically for the company in just one quarter. In 3QFY01 the company had 52% of its revenues coming from products and the rest from projects. In 4QFY01 the share of products dipped to 37%. This significant shift in business mix caused the company’s operating margins to come down to 39.5% for 4QFY01 (from 53.3% in 3QFY01).

    (Rs m) 3QFY01 4QFY01 Change
    Products 209 128 -38.8%
    Projects 196 215 10.1%

    The volatility is product sales could indicate two things. Firstly, the company’s products mostly fall into the discretionary category. That means that in case of an IT cost cut these products are the likely candidates to be delayed for the future. Also, the severity of the fall across product categories could be pointing to the fact that the company has not been able to create a strong brand.

    Revenues (Rs m) from  3QFY01   4QFY01  Change
    COM/DCOM Components 51 35 -32.2%
    Java Beans 46 26 -42.3%
    VisualSoft WebProject 97 61 -36.9%
    VisualeMART 9 4 -62.4%
    VisualSoft MediaKit 6 2 -
    Others Nil Nil -
    Total 209 128 -38.9%

    It was very interesting to note that in 4QFY01 VisualSoft’s geographic mix, changed in favour of the US compared to 3QFY01. The US contribution to revenues rose to 70% from 66% in 3QFY01. This is quite surprising, as most of the companies have reduced the share of revenues from the US in wake of the economic downturn there. Incidentally, Visualsoft too had stated that its product sales were lower due to the downturn in the US economy. But it is the revenues from Europe that seem to have taken a greater hit. Sequentially, the revenues from the US have come down by 11% but the revenues from Europe too have suffered by 28%. This again could point to the fact that some of the company’s products seem to be facing problems for reasons other than the US economic slowdown.

    In the days receivables the company has managed to bring the figure under 90 days for services related revenues. However, for the product related revenues the numbers have worsened. An amount of Rs 17 m has gone to a period of greater than 180 days. In the range of 90 to 180 days the company has now receivables upto Rs 88 m. Of the total receivables 75% are in the range of 90 days, 21% are in the range of 90 to 180 days and the rest have days receivables exceeding 180 days.

    The products business of the company does carry a high element of risk. To mitigate this company now needs to create a strong brand and step up its marketing efforts. In the projects business the concern is the high client concentration. 4 clients account for more than 5% of the revenues. The company now has 35 clients for the projects division, with five added during the last quarter. The company’s also needs to build a base of projects revenues, which can offset the element of risk that is inherent with the products business.

    At a current market price of Rs 179, the stock is trading at a P/E multiple of 6 times its FY01 earnings.



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