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Visualsoft: Fails to impress - Views on News from Equitymaster
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  • Oct 17, 2002

    Visualsoft: Fails to impress

    Visualsoft has announced its 2QFY03 results and they donít seem to be exciting. The results in comparison to its last quarter performance have been lacklusture. The topline has seen a 7% growth while its bottomline has grown by 9% QoQ. Operating margins are largely unchanged relative to the June quarter.

    (Rs m) 1QFY03 2QFY03 Change 1HFY02 1HFY03 Change
    Net Sales 279 299 7.2% 519 578 11.4%
    Other Income 12 10 -15.7% 26 22 -16.8%
    Expenditure 187 199 6.1% 371 385 3.9%
    Operating Profit (EBDIT) 92 101 9.4% 148 193 30.2%
    Operating Profit Margin (%) 33.0% 33.6% 28.5% 33.3%
    Interest 0 0 0 0
    Depreciation 23 24 2.3% 35 47 33.8%
    Profit before Tax 81 87 7.7% 139 167 20.5%
    Extraordinary items 0 0 0 0
    Tax 7 7 -7.1% 5 13 176.6%
    Profit after Tax/(Loss) 74 81 9.1% 134 154 15.0%
    Net profit margin (%) 26.5% 27.0% 25.9% 26.7%
    No. of Shares 19.7 19.7 19.7 19.7
    Diluted Earnings per share* 15.0 16.4 13.6 15.7
    P/E Ratio 12.5 13.1
    (* annualised)

    Software services has been the main growth driver for the company in the current quarter too. On a YoY basis, it has grown by nearly 29% while its products division has reported a 16% growth in revenues. Companies like Infosys, Mphasis and Mastek too have reported growth in services business. The company's focus on the services business has seen services outpace products in terms of growth. On a sequential basis, services revenues have improved by 7% while products revenues have grown by 6%.

    Operating margins have remained more or less the same with a marginal 60 basis points improvement over the last quarter. A 16% rise in other expenses has been the main reason why expenditure has gone up by nearly 6%. Sequential profit growth of 9% in this quarter seems subdued compared to a 14% sequential growth in June quarter. Going forward it may be difficult for the company to improve its operating margins, consequently affecting bottomline growth.

    Growth solutions
    Revenues (Rs m) 1QY03 2QY03 Change
    Software solutions 267 286 7.4%
    Products 12 13 6.5%
    Total 279 299

    Visualsoft has added 6 clients in the second quarter (5 in 1QFY03). It is also encouraging to note that the company has been able to increase the offshore component of its revenues from 72% in 1QFY03 to 73% in 2QFY03. Offshore operating margins are better for software companies compared to onsite margins. In addition to improving its offshore revenues, the company has also increased its concentration on the US markets. Revenues from US clients as a percentage of total revenues has gone up to 65% compared to 64% last quarter.

    Visualsoft has increased its manpower by 28 to 567 employees. The company is also foraying into the fast growing BPO segment. It is already in the process of setting up infrastructure for this purpose. While it is too early to say whether this venture will be able to show operating margins comparable to the software solutions division or not, it is certain that in the short term this decision will put pressure on the margins and consequently the bottomline. Also, higher capital expenditure towards BPO could deflate bottomline further.

    The stock is curently trading at Rs 205 a P/E multiple of 13x its annualised 2QFY03 earnings.It is likely that the second half of FY03 may see a continuation of the growth trend in the services business but products division may remain lacklusture. The stock is not likely to witness much activity until there is more clarity on the BPO plans of the company, as growth from other divisions seems to have already been factored in.



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