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SSI: Tough year closes - Views on News from Equitymaster
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  • Sep 17, 2002

    SSI: Tough year closes

    SSI closed FY02 with a 36% decline in revenues due to a bleak business environment especially for the IT education segment, where the company is a sizeable player. Its software business too, registered a drop in revenues for the fiscal. A steep rise in depreciation charges and fall in other income caused the net profits to decline by a huge 82%.

    Revenues (Rs m) 4QFY01 4QFY02 Change FY01 FY02 Change
    Education 519 211 -59.4% 2,308 1,215 -47.4%
    Software 379 373 -1.6% 1,627 1,428 -12.2%
    Others - - - 171 - -100.0%
    Total 898 584 -35.0% 4,105 2,643 -35.6%
    % Contribution 4QFY01 4QFY02 FY01 FY02
    Education 57.8% 36.1% 56.2% 46.0%
    Software 42.2% 63.9% 39.6% 54.0%
    Others - - 4.2% -

    For 4QFY02, the company posted a 35% decline in revenues, while the drop in net profits was a steep 108%. The company's operating profits grew by 8% on the back of a steep rise in operating margins as compared to 4QFY01. However, a steep fall in other income and higher depreciation charges wiped out all operating profits. Infact, had it not been for the extra-ordinary income of Rs 18 m, SSI would have posted a loss for 4QFY02.

    On the positive side, the company managed to cut costs aggressively and minimize the impact of the decline in revenues on operating margins. For the full year, the company registered a marginal 2% drop in operating margins inspite of the steep decline in revenues. The cost that the company managed to cut aggressively was the course execution cost. However, employee costs were lower by 28% in FY02 as compared to FY01.

    (Rs m) 4QFY01 4QFY02 Change FY01 FY02 Change
    Sales 898 584 -35.0% 4,105 2,643 -35.6%
    Other Income 142 20 -85.8% 361 208 -42.5%
    Expenditure 744 417 -44.0% 3,093 2,049 -33.8%
    Operating Profit (EBDIT) 155 167 8.2% 1,012 594 -41.3%
    Operating Profit Margin (%) 17.2% 28.6% 24.7% 22.5%
    Interest 26 18 -30.4% 68 48 -29.5%
    Depreciation 157 162 3.1% 324 640 97.7%
    Profit before Tax 114 7 -93.4% 982 114 -88.4%
    Tax 59 13 -77.1% 196 34 -82.6%
    Extra-ordinary income/(expense) (200) 18 (228) 18
    Profit after Tax/(Loss) -145 12 -108.1% 558 97 -82.5%
    Net profit margin (%) -16.1% 2.0% 13.6% 3.7%
    Diluted number of shares 13.4 13.4 13.4 13.4
    Diluted Earnings per share* -43.2 3.5 55.5 9.7
    P/E (at current price) 33.8 12.3

    Education business
    In the education business, the company has been witnessing significant decline in volumes. This is due to the fact that with job opportunities in the IT sector declining in the recent past, the optimism about IT as a career has subsided, with fewer students taking up IT education courses. Further, increased competition has reduced the company's pricing power. Consequently, it has seen realisations decline steadily.

    The extent of the slowdown in the software education industry is evident from the steep drop in registrations. For SSI, registrations for 4QFY02 were down by 40% compared to 4QFY01. However, the company saw an increased demand for institutional training and the company is now focusing on this segment. The number of centres declined from 771 in 3QFY02 to 760 in 4QFY02. This is due to the company's plan to reduce the number of centres operated by it from 42 to 21.

    Particulars Units Oct - Dec 01 Jan - Mar 02 Mar - Jun 02
    No of centres Nos 2,497 2,510 2537
    Revenues Rs m 742 814 920
    Revenue per centre Rs 297,157 324,303 362,633
    No of centres Nos 749 771 760
    Revenues Rs m 311 209 211
    Revenue per centre Rs 414,686 270,947 277,105

    Its competitor, NIIT, has steadily managed to improve its revenue per centre over the last two quarters. However, SSI has not been able to achieve the same. This could point to the fact that the company is yet to get its act together. Further, NIIT in the recent past has aggressively pursued business coming from the international markets like China and Latin America. SSI has failed to tap these markets also. Thus, the company has not been as aggressive as its competitors to counter the downturn in the domestic education market.

    Particulars Units Oct - Dec 01 Jan - Mar 02 Mar - Jun 02
    Revenue from education business Rs m 742 814 920
    Number of students Nos 159,163 106,288 108,191
    Realisation per student Rs 4,662 7,658 8,503
    Revenue from education business Rs m 311 209 211
    Number of students Nos 40,005 30,492 32,753
    Realisation per student Rs 7,764 6,851 6,430

    Software business
    While the revenues for 4QFY02 decline by 2% on a YoY basis, they grew by 4% on a sequential basis (QoQ). This could point to improving prospects for the company's software business. However, almost all of the software companies posted a much better performance for the quarter ended June 2002 owing to improving demand for IT services. During the quarter, SSI added six new clients.

    The company's geographic mix is significantly skewed towards the US. SSI earns 85% of its revenues from North America, while only 8% come from Europe. Considering the uncertain prospects of the US economy, the company could continue to face tough times ahead. With 68% of the revenues coming from onsite projects, there is a significant scope for the company to shift business offshore. This could help improve margins, since margins for offshore projects are higher as compared to onsite projects. The company's onsite billing rates at US$ 92 per hour are one of the highest in the industry. Software majors like Satyam and Infosys have onsite billing rates in the range of US$ 55 - US$ 60 per hour.

    At the current market price of Rs 119, the stock is trading at P/E multiple of 12x its FY02 earnings. The IT education business is showing signs of a recovery and the demand for software services is also improving. However, the sustainability of improvement in demand is significantly dependent on the US economy, the prospects of which continue to be uncertain. Thus, for retail investors it would be better to stick with bigger names rather than investing in smaller companies like SSI as they are prone to being the worst hit when business is not good.



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