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SSI: No show - Views on News from Equitymaster
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  • Sep 11, 2001

    SSI: No show

    SSI that had posted a loss for its 4QFY01 expects the weakness in the education business to continue throughout the fiscal FY02. The company had posted a loss due to weakness in both its business areas, software and education, and an investment write off of Rs 200 m. While the education business (58% of total revenues) had posted an 8% drop in revenues in 4QFY01 on a sequential basis, the figure for the software business (42% of total revenues) was 14%.
    To read more about the results please click here

    (Rs m) FY00 FY01 Change
    SSI Education 1,310 2,308 76.2%
    % of revenues 66.3% 56.2%  
    SSI Technologies 474 1,627 243.0%
    % of revenues 24.0% 39.6%  
    Enterprise support 191 171 -10.6%
    % of revenues 9.7% 4.2%  

    The company expects the overall training market to shrink by 20% in FY02 compared to FY01. This can only mean that the going will get tough for SSI. The competition would intensify and would lead to pricing pressure for the software education companies. The drop in realisation would affect the margins adversely. The company in FY01 has seen an 82% volume growth (number of students) in the education business but the revenues per student (realisations) declined by 3%. Infact, in 4QFY01 the company had show a sequential drop of 7% in student registrations. The 4Q and 1Q (April to September) are the best quarters for the company.

    Assuming that SSI manages to hold on to its market share, then too it is slated to see a decline of 20% in volumes. The decline in realisations could be as sharp as the decline in volumes. If this happens the company could see a decline of 36% in revenues from the software education business in FY02 compared to previous year. The company in its guidance has already stated that the revenues from education business in FY02 would be lower compared to FY01. The operating margins for the software education business was at 10% in 4QFY01 and this would definitely head south if the realisations per student declines.

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

    SSI was one of the very few software companies that actually posted a sequential drop in revenues. The operating margins in the software education business too were way below industry standards. In the current year, the company is expecting a modest rise in revenues on the back of blended billing rates moving up. In an environment where all the software majors are facing downward pressure in billing rates it is quite unlikely that SSI will manage to negotiate a billing rate hike with its customers.

    Thus, the company is most likely to see a decline in the EPS for FY02. At a current market price of Rs 141, the stock is trading at a P/E multiple of 3 time its FY01 earnings. According to our estimates if the software education business declines by 36% and the software business manages to earn as much as the earnings in FY01, the EPS could decline by 67% due to falling margins in either businesses. Thus, the stock now trades at a P/E of 10 times its FY02 estimated earnings.



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