Silverline has declared a 34% fall in sequential profits for the fourth quarter of the year ended March ’01. The company’s topline too fell by about 19%. During the year, the company acquired four companies and is now going for one more acquisition of the US based CTC Corp.
After growing at a scorching rate, the software industry is now feeling a downturn. As Silverline operates at a lower end of value chain, it is likely to face tough times going forward in growing organically. Silverline has already forecasted lower topline growth of 30% for FY02.
The company is consolidating its business by moving more work from international locations to offshore, which will reduce costs, both for Silverline and its clients. It currently has three SDCs in India located at Chennai, Mumbai and Hyederabd. It has already closed the Banglore and Chennai SDC and transferred the projects to other SDCs. The capacity utilization at these centers is in the range of 50%-70%. To curtail the cost further, the company is going slow on recruitments of employees. Its operating margins, which currently stand at 40%, are not likely to expand further with the pressure on billing rates and longer sales cycles.
The company is expanding geographically to de-risk its revenues base. It acquired $24 m, Sky Capital International, Hong Kong based company in October ’00 in an all cash deal. It is actively looking to acquire companies in Europe in the healthcare and finance domain. US based SeraNova with a revenues base of $72 m was its largest acquisition. Silverline has recently completed the integration of SeraNova. The acquisitions made by the company in the current year are expected to generate revenues of $ 200 m in FY02 on a consolidated basis, a growth of about 30%.
In line with the strategic expansion plans, the company is eyeing the acquisition of CTC Corp and its subsidiaries in the US. It will issue ADRs upto 4.5 m to acquire, $ 20 m CTC. This translates to a valuation of 0.8x market cap to sales. This is relatively on a lower side considering its other acquisitions.
The business of CTC mainly consists of staff supplementation, e-solutions and training. The training services are being provided as an active education center for New Jersey Institute of Technology (NJIT). The company also provides systems integration, software design & developments to business, government and industry. The company is a leading solution provider in B2B, e-commerce and CRM domains. CTC has over 300 employees and has 3 offices & 2 training centers in New Jersey, and a development center in Hyderabad. The Company's client list includes Unisys, AT&T Global Solutions and Avaya.
Among the other developments, the company is planning to issue 10 m warrants on preferential basis to Subra Mauritius Ltd, a promoter group company incorporated in Mauritius. The warrant will be convertible into equity shares at an exchange ratio of 1:1 for a price of Rs 157 per share (premium of above 100% compared to its current market price). The move of the company will however dilute the equity base, resulting in lower earnings per share, consequently higher valuations.
At the current market price of Rs 74, Silverline is trading at a P/E of 5 times FY01 earnings and 3.7x FY02 projected earnings (without considering dilution). However, if we consider a dilution in the equity base the stock is trading at a P/E of 5x FY02 earnings. Even if Silverline manages to successfully integrate the businesses of companies it acquired, expanding equity base will not hold good for the company.
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