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Silverline: Analyst meet - Views on News from Equitymaster
 
 
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  • Aug 14, 2001

    Silverline: Analyst meet

    Recasting image
    Silverline’s new man in charge Mr. Ravi Singh, Co-CEO, plans to change the way things have been with the company and therefore, recast the company’s image. According to Mr. Singh as the company had a US based management; there was a lack of communication with the investor community. Therefore, a divergence in perception (negative perceptions) regarding the company and this led to the company’s valuations being low (compared to what the management feels should have been). But now the management wants to change the perception and has promised increased disclosure in the future. The company has started an image building exercise and is trying to do away with it negative perceptions that people have hold in the past.

    As a part of the effort, Silverline disclosed separately figures for its projects and employee augmentation businesses. This is commendable for two reasons: firstly, not many companies admit to the fact that they are into the employee augmentation (body shopping) business and secondly, the company also gave operational details from this area.

    Particulars Services Staff Augmentation
    Revenues (Rs m) 1,358 763
    % of total revenues 64% 36%
    Gross Margin 40% to 45% 20% to 25%
    Active clients 39 127
    Billing rate/ per hour    
    Onsite US$ 80 - 120 US$ 60-80
    Offshore US$ 22 - 35 N.A

    Future Strategy
    To ally fears about the company’s growth, the management outlined strategy for the immediate future. Silverline plans to cash in on opportunities coming from maintenance and systems integration. In wake of the economic slowdown, companies are directing their IT spend towards keeping existing systems up & running and also increasing operational efficiencies. This means that maintenance and system integration are now getting a larger chunk of the IT spend. New application development has taken a backseat for the time being. As of June 30th 2001, 86% of Silverline’s revenues were from development, integration and maintenance. The company is expecting a growth of about 50% from maintenance in the near future. However, for FY02 the company forecasted about 30% growth in the topline.

    Silverline also plans to de-emphasize its staff augmentation business that currently contributes 36% to its revenues. The company aims to bring down the proportion of this business to as low as 20% of the revenues in the next 12 to 18 months. As the business is at the lower end of the software value chain the operating margins are quite low compared to other offerings.

    To manage cost, the company has laid off people. This was due to redundancy created after the merger of Sera Nova and Silverline. The people laid off were mostly from the HR and administrative functions. The company has also realigned salaries (pay cuts and hikes) of employees according to the billing rates the company quotes for their skill sets.

    Valuations
    At the current market price of Rs 43, the stock is trading at a P/E multiple of 5 times its 1QFY02 annualised earnings. This is significantly lower compared to other software companies in the software sector. It is probably due to this subsidy in valuations that the management has decided to be more transparent. The positives of the company are that it has the advantage of size (is seventh largest software exporter in FY01) and the company has an impressive client list.

    The management is trying to do away with the negative perception or what it would like to term as divergence in perception. Therefore, it would be worth to wait for the management to deliver what it is promising.

     

     

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