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Silverline: Growing inorganically

May 31, 2001

Silverline Technologies fourth quarter profits dropped by 34% QoQ and revenues declined by 19%. Its operating profit margins too witnessed a fall of over 300 basis points compared to previous quarter. The challenging business environment in the US has taken its toll on the company's performance.

(Rs m)FY00FY01Change3QFY014QFY01Change
Sales 1,953 2,727 39.7% 749 610 -18.5%
Other Income 42 366 775.1% 80 60 -24.5%
Expenditure 1,194 1,637 37.0% 450 388 -13.9%
Operating Profit (EBDIT) 758 1,090 43.8% 299 223 -25.4%
Operating Profit Margin (%)38.8%40.0% 39.9%36.5%-8.5%
Interest 15 10 -35.4% 2 1 -55.4%
Depreciation 80 103 28.4% 26 28 7.9%
Profit before Tax7061,34590.6%350254-27.5%
Other Adjustments4 -   - -  
Tax - 30   - 24  
Profit after Tax/(Loss) 702 1,315 87.4% 350 230 -34.2%
Net profit margin (%)35.9%48.2% 46.8%37.8% 
No. of Shares (eoy) (m) 64.5 85.7   85.7 85.7  
Diluted Earnings per share* 8.2 15.3 16.410.8 
P/E (at current price)  5.6    8.0  

On a full year basis, the company's performance was however satisfactory with 87% jump in profits and 40% growth in sales. Its operating margins at 40% are one of the best in the industry. Silverline's focus on fast growing verticals like financial services (account for 57% of total) has enabled it to sustain such high margins.

Silverline's revenue mix is largely in favour of e-business, which contributed 48% of total turnover followed by 28% from client server, 20% from mainframe and 4% from CRM. Currently it has 168 active clients and derives 36% of revenues from offshore. The company still needs to upgrade its software value chain to maintain the high margins and sustain high growth.

During the year, Silverline utilised its ADS proceeds (US$ 125 m) in acquiring strategic stakes in several companies including the largest one, SeraNova, the US based e-business solutions company. SeraNova was consolidated with effect from March 6, '01 and consequently only part of its financials are included with Silverline.

In the coming years, Silverline is planning to leverage on the acquisitions and its global infrastructure (offices in 11 countries) to achieve long term growth. The company also aims to focus on shifting more work to offshore, pursue larger outsourcing deals and reduce the contribution from lower margin businesses (client server and main frame) to strengthen its business.

At the current market price of Rs 86 Silverline is trading at a P/E of 6 times FY01 earnings. The company expects its topline to grow in the range of 30% in FY02. Its other income is however expected to show substantial improvement boosted by its acqusitions. This could maintain its earnings growth above 50%.

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