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SSI: Investment concerns

Aug 28, 2001

In 4QFY01, SSI has posted a loss of Rs 145 m compared to a net profit of Rs 309 m in 4QFY00. This was due a provision of Rs 200 m for an investment made in a subsidiary company Netfinex.com. The company however, has posted operating profits of Rs 155 m. Excluding the extraordinary item, SSI's profits have declined by 82% YoY. However, due to the slowdown in the US economy the software and education business saw a sequential fall of 14% and 8% respectively. Consequently, the company's operating margins declined significantly compared to 4QFY00. While the staff costs and course execution charges grew by 234% and 98% respectively, the revenues grew by only 33% in 4QFY01. The positive is that the company's operating margins are the best amongst the software education majors for the quarter ending June 2001. Aptech and NIIT reported more than 90% drop in profits.

During the quarter the company has undertaken a restructuring exercise. Consequently, it has closed the Enterprise Support Division. Also, the company wrote of its investments as mentioned above.

(Rs m) 4QFY00 4QFY01 Change FY00 FY01 Change
Sales 675 898 33.1% 1,975 4,105 107.8%
Other Income 155 142 -7.9% 168 361 114.4%
Expenditure 398 744 86.8% 1,264 3,093 144.7%
Operating Profit (EBDIT) 277 155 -44.2% 711 1,012 42.3%
Operating Profit Margin (%) 41.0% 17.2% - 36.0% 24.7%  
Interest 18 26 - 35 68 93.3%
Depreciation 37 157 319.8% 149 324 117.0%
Profit before Tax 376 114 -69.7% 695 982 41.2%
Tax 67 59 -12.5% 126 196 55.4%
Extraordinary Items - 200 - - 228 -
Profit after Tax/(Loss) 309 -145 -146.8% 569 558 -2.0%
Net profit margin (%) 45.8% - - 28.8% 13.6%  
Diluted number of shares 66.1 13.5 - 13.486 13.5  
Diluted Earnings per share* 109.9 - 4.6% 42.2 41.4 -2.0%
P/E (x)   - - 4.1 4.2  
*(annualised)

For FY01 SSI recorded a growth of 108% in revenues and a 2% decline in net profits including extraordinary items. Excluding the extraordinary items the company's net profits grew by 38%. While 56% of the revenues came from education (66% in FY00), 40% came from its software business (24% in FY00). The contribution of the enterprise support division was 4%.

OPM (%) 4QFY01 FY01
Education 10.4% 22.2%
Software 26.5% 30.7%

For the education business the company had announced earlier that it will gradually adopt the franchisee model. This would effectively bring down the operational costs for the company.

SSI like other software majors earned about 47% of its revenues from the banking, financial services and insurance industries. The other verticals that contributed to its revenues were telecom and healthcare. 74% of the software related revenues for FY01 came from the US, Europe 12% and rest of the world contributed the rest. One of the reasons for the decline in margins could have been the contribution to revenues from onsite business rising sharply from 19% in FY00 to 53% in FY01. Thus, to improve margins SSI will have to work towards increase offshore revenues.

At the current market price of Rs 174, the stock is trading at a P/E multiple of 4x FY01 earnings. The valuation could see a further downside as uncertainly clouds the prospects of both its businesses.


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