Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
SSI: Anomalous expansion - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Jun 28, 2001

    SSI: Anomalous expansion

    SSI that started as a software education company in 1991 and was quite successful in the business. Then it moved into software services just like most of the software education majors (NIIT and Aptech) have done. Presently it has about 90% of its revenues coming for software education and the remaining 10% from software services. The company has 7% market share in the education market making it the third largest player in India. Though SSI has not specifically put it in words, the company might be facing difficult times due to the slowdown in the US. In fact for 3QFY01, SSI saw operating margins come down by almost 500 basis points compared to 3QFY00.

    However, a recent move by the company has raised eyebrows in the investing community. The company borrowed Rs 500 m from IDBI at 12%, inspite of the fact that it has Rs 2,500 m in cash. Though the company has not given any specific reason as to why it has borrowed the cash, one of the reasons could be that SSI earned better returns (excess of 12%) on its investments in the past. Therefore, the company would be able to generate returns on the spread i.e. the difference between what it has to pay to IDBI and what it generates from its investments.

    According to SSI it had managed to get returns to the tune of about 15% on cash it has in its books by investing the money in pure debt mutual funds in March 1999 and pulling out April 2001. Therefore, the company got spread across three assessment years from 1999 to 2001. The effective yield that the company got on these gains was overall 15%. And, in the future the company expects to generate returns of about 14% from its investments.

    However, this decision does not seem to make sense and on the contrary has raised many concerns. SSI on the 31st of March 2001, had investments of Rs 1,762 m. The cash and bank balance totaled Rs 1,672 m. These two items together were Rs 3,434 m. According to Mr. Suresh Kalpathi, the CEO of SSI, Rs 185 m was invested with mutual funds and the rest were with banks. Therefore, what was the reason behind the company's decision to borrow even after having so much cash in its books? To earn interest spread? But as far as we recollect the company is in the software education and services business and is not exactly a finance company.

    Secondly, even though debt instruments are closest to being risk free, returns to the tune of 15% cannot be guaranteed. Therefore, there is an uncertainly in the returns the company will be able to generate. However, it will have to pay 12% to IDBI as interest.

    The other income figure for the company was Rs 219 m for the first nine months for FY01. This translates to a return of 12% on its investments (Rs 1,762). However, considering the fact that it had a similar amount in cash (Rs 1,672 m), the return on cash and investments comes to just 6%. Had the company taken loan to expand its business activities it would have made more sense as the company itself has operating margins of about 27%. Therefore, by investing the money in itself the company could have generated more returns.

    Returns FY00 FY01*
    Other income (0I) in Rs m 168 219
    % Return on Cash (OI/cash) 4.8% 13.1%
    % Return on investments (OI/investments) 14.6% 12.4%
    % Return on cash and investments 3.6% 6.4%
    * For FY01 OI figure only for 9 months

    There seems something wrong in the management's ideologue, or we are too na´ve to understand their financial wizardry. In both the cases, the lack of transparency comes out as a big concern, especially in such a difficult time for the software and related companies.



    Equitymaster requests your view! Post a comment on "SSI: Anomalous expansion". Click here!


    More Views on News

    Tech Mahindra: Our Revised View (Quarterly Results Update - Detailed)

    Aug 2, 2017

    A better than expected turnaround in performance results in a change in view.

    Wipro: A Decent Start to the Year (Quarterly Results Update - Detailed)

    Jul 27, 2017

    Digital services drive growth for Wipro in 1QFY18.

    Infosys: A Decent Start to FY18 (Quarterly Results Update - Detailed)

    Jul 14, 2017

    Infosys starts FY18 on an encouraging note with a stable performance.

    TCS: Currency Volatility Plays Spoilsport (Quarterly Results Update - Detailed)

    Jul 14, 2017

    TCS starts FY18 decently despite an adverse currency impact.

    HCL Tech: Ends FY17 on Expected Lines (Quarterly Results Update - Detailed)

    Jun 29, 2017

    Volvo partnership caps a good year for HCL Technologies.

    More Views on News

    Most Popular

    This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)(The 5 Minute Wrapup)

    Aug 17, 2017

    A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.

    Dear PM Modi, India is Already Land of Self-Employed, and It Ain't Working(Vivek Kaul's Diary)

    Aug 21, 2017

    Most Indians who cannot find jobs, look at becoming self-employed.

    It's the Best Time to Buy IT Stocks(Daily Profit Hunter)

    Aug 16, 2017

    The IT Sector could be in an uptrend till February 2019. Are you prepared to ride the trend?

    Think Twice Before You Keep Money In A Savings Bank Account(Outside View)

    Aug 22, 2017

    Post demonetisation, a cut in bank savings deposits rates was in the offing.

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 24, 2017 03:36 PM


    • Track your investment in PVP VENTURES with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
    • Add To MyStocks