Silverline has recorded an impressive 94% growth in profits for the 3QFY01. The profits growth was mainly driven by higher other income (through forex gains and ADS related income). Although, on a quarter on quarter basis the company's operating margins improved, they have actually declined 130 basis points on a year on year basis.
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The company currently derives 43% of its revenues from e-business and 7% from CRM while the balance 50% of revenues come from low value added work (30% from legacy and 20% from client-server). 35% of its revenues are from offshore development and the balance from onsite. The company's future operating margins will depend on its ability to move up the software value chain.
During the quarter Silverline has acquired the US based e-business solutions company SeraNova for US $ 99 m in an all stock deal. The acquisition is expected to build strong synergies between the e-business capabilities of SeraNova and the low cost delivery model of Silverline. The combined entity will also have the largest sales and delivery infrastructure in the US.
SeraNova carries accumulated losses of US$ 7 m along with around $ 14 m in outstanding loans from its parent company, Intelligroup. SeraNova is involved in the design and implementation of Internet based software applications, catering mainly to Fortune 2,000 companies. Its top two customers (American Express and Volkswagon) account for around 54% of revenues. Thus the risk from client concentration is high since loss of any one client will have a significant impact on its financials. The company had earned revenues of $36 m as on December 1999. It is projecting to earn $72 m for the current year. Nevertheless, the key question remains how the two companies, with disparate salary structures and possibly overlapping marketing and sales structures, will smoothly integrate into one team without any employee attrition.
We feel that the price paid by Silverline at 1.6 times forward revenues of SeraNova is on the higher side. The ratio fixed at 0.35 means that the equity dilution for Silverline will be around 14%, diluting the earnings of Silverline substantially. The management, however justified the acquisition on the basis of a strong project pipeline.
Silverline has recently raised US$ 125 m through an ADS issue. The company has utilised $ 12.5 m cash in acquiring 6% strategic stake in TIS Worldwide and $ 22 m for the acquisition of SKY Capital International.
At the current market price of Rs 310 Silverline is trading at a P/E of 11 times its 3QFY01 annualised earnings. The company's future valuations depend on its ability to generate returns on the amount invested by it. Also it will have to utilise its excess cash efficiently in order to maintain its high growth rate.
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