On a consolidated basis Silverline posted very disappointing financials for 2QFY02. The company’s revenues on a consolidated basis grew by 8% YoY and declined 13% sequentially.
This is due to a 44% sequential decline in the staff business that the company has been phasing out. Silverline’s projects business has registered a 4% sequential growth, which is low compared to industry majors. However, the bad news is that Silverline’s operating margins have taken a hit. This is due to the company not being able to offset the decline in income from staffing by adequately ramping up revenues from other segments.
For 2QFY02, the company has posted a loss of Rs 312 m (US$ 7 m) due to providing Rs 384 m (US$ 8 m) as restructuring expenses and bad debts. Of the total (Rs 354 m) Rs 249 m (US$ 5.8 m) was provided towards bad debts. For 1HFY02, Silverline has already written off Rs 589 m (US$ 11 m).
The operating margins declined from 25% in 1QFY02 to 20% in 2QFY02. While the company’s cost of revenues have declined the SGA expenses have increased considerably. The decline in cost of revenues is primarily due to decrease in employee costs as the company has realigned employee as per demand in the current scenario.
All of Silverline’s revenues streams in the projects business other than package implementation saw growth. This revenue stream saw an 8% sequential decline. This was quite opposite to the trend shown by other software companies. However, the revenues from maintenance exhibited strong growth (16% sequentially), similar to others in the sector. The company added 9 new clients during the quarter. Silverline’s offshore revenues increased by 16% sequentially increasing the contribution from offshore development to 31%. This indicates that the company is moving more projects offshore and should benefit in terms of improved margins in the future if the trend continues.
The company has revised its revenue guidance for FY02 to Rs 7.5 bn to 7.8 bn (US$ 160 to165 m) down from Rs 9.1 bn to Rs 10 bn (US$190 to 210 m). This translates to the fact that Silverline has revised its topline growth figures from the previous range of 22% to 35% to 3% to 6% currently. Silverline expects to earn Rs 5.7 bn to Rs 6 bn (US$ 120 to 125 m) from the solutions business. The operating income is expected to be Rs 1.4 bn to Rs 1.6 bn (US$ 30 to 35m). The operating margins, therefore, is expected to be in the range of 19% to 21%. The figure is very low compared to the industry average of 33%.
Obviously, the management’s revision in guidance is based on the premise that economic environment has become tougher. While it is de-emphasizing on the staffing business the other areas are not providing such a significant growth opportunity to offset the loss in revenues from staffing. At the current market price the stock is trading at a P/E multiple of 10x 2QFY02 annualised earnings (Indian entity’s earnings). The valuations should remain range bound based on the performance. However, in the recent past tech stocks have gained quite sharply. This could further improve Silverline’s valuations.
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