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VisualSoft: Changing gears

Aug 27, 2002

VisualSoft posted a strong 8% growth in revenues for 1QFY03. This was the third consecutive quarter where the company managed to post a sequential growth in revenues and also improve its operating margins. This consistency in performance could be a sign of the company finally managing to get its act together.

Stabilizing?

As a recap, in FY01, VisualSoft was different software company. It derived almost half of its revenues from products, a feat no other listed Indian software company (at that time) had managed. The company was growing swiftly due to a significant contribution from products and at one point of time it had operating margins in excess of 50%. The stock was a darling on the bourses. Then trouble struck. VisualSoft’s hit a speed breaker due to decline in sales of its products. From 4QFY01 onwards the company’s product related sales fell steeply. As a result, the contribution of the product sales to total revenues slipped from 52% in 3QFY01 to 4% in 1QFY03.

VisualSoft started rethinking its business strategy. The company decided not to focus on the products business in future and concentrate on its services revenues. The company managed to perform rather well on this front and revenues from its services business grew steadily in FY02. Services revenues grew by a strong 36% in FY02, as compared to a 22% decline in total revenues.

The company is looking at different options to add pace to its topline. This includes the tapping R&D outsourcing market and a possible entry in the business process outsourcing (BPO) segment. VisualSoft plans to address the embedded technologies segment in the R&D sphere. The market for embedded systems is at a nascent stage and global technology majors are spending significant amounts on R&D to perfect technologies like Bluetooth, ASIC (application specific integrated circuits) and SoCs (Systems on Chips). Companies like Wipro and HCL Technologies have a significant presence in this segment. Therefore, VisualSoft will have to face stiff competition from these majors. Also, considering the fact that VisualSoft has not executed any significant project in this area, getting a share of the market will be an uphill task. However, with the market for R&D services estimated to be about 15% of the total exports of the Indian software industry in FY01 (US$ 1 bn), there seems to be room for a lot of players.

Business process outsourcing on the other hand, seems to be a more viable option for the company. As companies concentrate on the core activities, IT-intensive business processes are delegated to an external service provider. The service provider owns, administers and manages the processes. Many of the processes that are outsourced are routine in nature, like payroll management. These areas do not require skilled human resource. According to Gartner, the global market for BPO will nearly triple from US$ 106 bn (Rs 5,088 bn) in 1999 to US$ 301 bn (Rs 14,448 bn) in 2004. But the flip side is that barrier to entry in this segment is low. The company announced in 1QFY03 that it plans to go live with the BPO initiative within the next 18 months and will employ about 1,000 people.

At the current market price of Rs 180, the stock is trading at a P/E multiple of 12x FY03 expected earnings. Considering the performance in the recent past and the fact the its valuations are on the lower side, the stock could be a one of the key gainers if the interest in the technology sector revives. However, retail investors should also understand that the risk element in the stock is very high considering its low revenue base, relatively lesser number of clients and of course its disastrous performance in the past. Also, three quarters is a short time to judge a company.

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