VisualSoft is desperately looking at alternatives for growth. VisualSoft’s steep growth in FY01 hit a speed breaker due to decline in sales of its products. From 4QFY01 onwards the company’s product related sales have shown significant sequential declines. The contribution of the product sales to total revenues has slipped from 52% in 3QFY01 to 5% in 2QFY02. Consequently, the operating margins seem to have followed suit, and have declined from 53% in 3QFY01 to 22% in 2QFY02.
|Growth in product sales (QoQ)
VisualSoft is now rethinking its business strategy. The company has earlier stated that its does not plan to focus on the products business in future and is now looking at different possibilities to add pace to its topline. This includes the tapping R&D outsourcing market and a possible entry in the business process outsourcing (BPO).
Read more about the R&D outsourcing market.
The segment of the R&D market that VisualSoft plans to address is that of embedded technologies. The markets for embedded systems are in very early stages, and global technology majors are spending significant amounts on R&D to perfect technologies like Bluetooth, ASIC (application specific integrated circuits) and SoCs (Systems on Chips). Companies like Wipro and HCL Technologies have a significant presence in this segment. Therefore, VisualSoft will have to face stiff competition from these software majors. Also, considering the fact that VisualSoft has not executed any significant project in the area getting a share of the market will be an uphill task. However, with the markets for R&D services estimated to be about 15% of the total exports of the Indian software industry in FY01 (US$ 1 bn), there seems to be room for a lot of players.
Business process outsourcing on the other hand seems to be a more viable option for the company. As companies concentrate on the core activities, IT-intensive business processes are delegated to an external service provider. The service provider owns, administers and manages the processes. Many of the processes that are outsourced are routine in nature like payroll management. These areas are do not require skilled human resource. According to Gartner, the global market for BPO will nearly triple from US$ 106 bn (Rs 5,088 bn) in 1999 to US$ 301 bn (Rs 14,448 bn) in 2004. But the flip side is that barrier to entry in this segment is low.
Further, VisualSoft plans to consolidate its Indian operations and strengthen its overseas operations by establishing three more business centres in the US. It has also undertaken the task of re-skilling its employees to align their skill sets with the current market environment.
It will take quite sometime for the company’s strategy to show an impact on its financials. Investors should wait for the company to get a business model in place before considering it as an investment option. All companies are undergoing a tough time and VisualSoft is no exception to the trend. Therefore, is it wise for the company to shift its focus from its products business? This could point to the fact that the company is there just to grab a piece of the rapidly growing markets and is possibly indifferent to creating a fundamentally strong business.
At the current market price of Rs 192, the stock is trading at a P/E multiple of 15x its FY02 estimated earnings. The stock price has moved up significantly, from Rs 60 in the first week of October. This has been the case with all technology stocks on the anticipation of a recovery in sector. However, the signs of recovery are very faint and a round of bad news could hurt the valuations.