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VisualSoft: Dip, Dip, Dip - Views on News from Equitymaster
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  • Oct 22, 2001

    VisualSoft: Dip, Dip, Dip

    VisualSoft continues to be in trouble. For 2QFY02, the company has posted very disappointing numbers once again. The topline has fallen by 18% sequentially and the dip in net profits is 46%. On a YoY basis, revenues have declined by 22% and the bottomline has come down by 69%.

    Te reason for concern is that the product sales continue to decline sharply and this shows no signs of letting up. In 1QFY02, the company had posted a sequential dip of 59% in product related revenues and in 2QFY02 the figure is 80%. While in the earlier quarters only the company's product sales were in trouble, this quarter its services revenues too have shown a sequential de-growth of 3%.

    (Rs m) 1QFY02 2QFY02 Change
    Sales 285 234 -17.9%
    Other Income 10 16 62.3%
    Expenditure 188 182 -3.2%
    Operating Profit (EBDIT) 97 51 -46.7%
    Operating Profit Margin (%) 33.9% 22.0%  
    Interest - -  
    Depreciation 13 19 40.9%
    Profit before Tax 93 49 -47.5%
    Tax 2 2 25.4%
    Profit after Tax/(Loss) 92 47 -48.9%
    Net profit margin (%) 32.1% 20.0%  
    Diluted number of shares (m) 19.7 19.7  
    Diluted Earnings per share* 18.6 9.5  
    P/E (at current price)   8.6  

    With the declining contribution of product related revenues to sales (which now stands at 5% of revenues) the company’s operating margins have declined sharply. The contribution of product sales to revenues has declined from 48.2% in 2QFY01; this translates to a 92% dip in product related sales YoY.

    (Rs m) 1QFY02 2QFY02 Change
    Services 230 223 -3.2%
    % Contribution to revenues 80.8% 95.3%  
    Products 55 11 -79.9%
    % Contribution to revenues 19.2% 4.7%  
    OPM 33.9% 22.0%  

    VisualSoft has managed to keep a tab on its costs. Both the staff and miscellaneous costs have shown a decline compared to the first quarter of FY02. However, this dip has not been in line with the sharp fall in topline causing the operating margins to head south. The contribution of offshore revenues has increased from 59% in 1QFY02 to 65% of its services revenues in the current quarter. However, the revenues from product related services have shown a steep drop of 47% sequentially and this has caused the contribution to services revenues to come down from 11% to 6%. VisualSoft added 5 new clients during the quarter.

    With a share of 63% of the revenues, the US was the largest market for the company. Europe’s contribution was 28% and others contributed 8%. However, VisualSoft is looking at diversifying its markets. The company has signed up distribution contracts with two Japanese companies namely ‘International Systems Research Company’ and ‘New Tone’, for the company’s product namely VisualeSales and VisualSoft NetDev. These companies will translate the products in Japanese language and market them in the region. The company also tied up with a US based company called ‘IT Global Secure’ for distributing its security products. In all, the total number of channel and distribution partners as at 30th Sep 2001 stands at 30 in number.

    At the current market price of Rs 82, the stock is trading at a P/E multiple of Rs 9 times its 2QFY02 annualised earnings. The September quarter was in fact quite positive for the software sector going by the numbers that companies have posted. However, VisualSoft failed to show any improvement in its performance during this quarter. The third and the fourth quarters are expected to be even tougher in the wake of tragic events in the US. Thus, VisualSoft’s performance in the next two quarters could be even more dismal. Thus, the valuations that have run up post results could be temporary and the stock might return to price levels seen before the results and remain range bound.



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